Elderly should eschew Stranger Originated Life Insurance - Dallas Business Journal:

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Now it’s our parents who could be at risk from But instead of candyor puppies, seniors are beinbg lured by speculators with offers of a cash lump sum, free life and sometimes even a free cruise — all in returnb for simply getting a life insurance policy and agreeing to sell it to them two yearse later. Harmless? Well, would you want an unknowh party to have an interest in yourearlyh demise?
While you may not wish to advis e your mom to run screaming, here are 10 things you migh t want to tell her and other seniors about Stranged Originated Life Insurance policies: • Stranger Originatef Life Insurance (STOLI) policies involvde investor groups (like hedge funds) enticin seniors to obtain life insurance purely for the purpose of sellinfg it for a substantiakl sum, and transferring the death benefitas to the speculators. The speculator aims to profit when theinsurecd dies.
• Once the policy is the investor group has a financiak interest inthe insured’s death the sooner the insured dies, the more profit is • When the policy is sold, the seniorr typically receives a cash lump sum which is less than the face but substantially more than the cash valu of the policy. Often other giftx such as a free cruiser or car are also offered to lure seniorxsto sign. In most cases, the insurec doesn’t even have to pay the premium. The investorsd arrange for the premium to be Aftertwo years, the policy is transferred to the investo r group and the loan doesn’rt need to be paid back.
So the insured rarely, if needs to pay out of • What many seniorse don’t know: Any incentive gift, free insurance, cash lump sum or forgivenessd of the premium finance loan istaxabld income. • After transfer, the original policy holders have no control overfuture transfers, so are unlikely to know who has a financialk interest in their death. Sometimes, there are multiplr persons with an interest inthe policy, with many investors locatee in foreign countries.
• The two yearw of free life insurance might notbe free, as the policyt holder may have to pay tax on the value of the This period of free insurance is offered becausse many states have a two-year contestability perio d after which it would be more difficulyt for the insurance company to rescind the • There is a limi to the total amount of life insurance that can be purchase by an individual. What seniors may not realize is that an individualk may use up their insurability by engaginf in a STOLI transaction becausse the policy remainsin force.
An insures may be left out in the cold if a future insurance need arises or if the insured becomes uninsurablre because of an adversehealth change. Those participating in a STOLI agreement face loss of privacy as they are requiredf to give permission for someone to check on their health and This information will be used not only by theoriginal investors, but also may be used by other personws who end up having an interest in the policy. If there is no insurable interest in an insurance policyat inception, the policy is invalid and the transaction is a fraud on the life insurance company.
By signinbg on the dotted line, the insuree could be implicated in the fraud and subject tolegal liability. Many states now have laws or regulations designedd to provide consumers with protection againstthese transactions. Some states even put a moratoriunm on the transfer of life insurance death benefitsx for periods of up tofive years. So what shoulde we tell our parents to do if someone approaches them with sucha deal? Just say no. If you purchasedx life insurance ingood faith, but find that you no longee need or want the insurance, you can legally sell your policy and transfer the deatn benefits to a thire party at a market Such a transaction is calles a life settlement.
This can seem an attractive optio n if you find that the premiums on your policg have becomecost prohibitive, or you need to access the equity in your life However, you should remember that you will be taxed on any lump sum you And as the speculator has set the market priced to make a profit on your demise, it’s unlikel y that you will receive the true value of the Also, as in STOLII transactions, a third party has a financiak interest in your early death, and your if you find you need insurance in the future, may be If you do need to access the equitty in your life insurance policy, there are other options. For instance, you may wish to consider a bank loan if youcan qualify.
With a life insuranc e policy as collateral, such a loan works well for all You get cash when you need it without payinggincome tax, the banks get guaranteed and your beneficiaries receive the full valuew of the policy. Life Settlement transactionsa are not always abad idea, but you should be aware of the factsw and other options availabled to you. A trusted financial adviser can help you understands the details and help you makegood decisions. Strange Originated Life Insurance policies, on the other hand always be avoided.