13 September 2013 0 Comments

If It Sounds To Be Good To Be True….

big questionsThe balance of this saying is…it probably is.  In my last entry on Stranger Originated Life Insurance (STOLI) I described the ultimate bad of these types of arrangements.  It was the two old ladies who found two indigent men to insure and then killed them for the life insurance proceeds.  The ladies got life in prison…but it was a much worse deal for the insured men who didn’t recognize the deal as too good to be true.

STOLI arrangements of a less onerous nature were quite prevalent a few years ago.  A typical proposal might be made to an older, wealthy individual where they would be offered a “free”, substantial life insurance policy for a two year period of time followed by payment of a lump sum of money for transferring ownership of the policy to the instigator of the scheme.  At that point the policy would be sold to as an investment and the original insured would get a portion of the sale price.

These arrangements are less likely to occur today because the insurance companies, who don’t like to be part of these deals, have added questions on their applications regarding potential future ownership arrangements and declining to issue policies that appear to be part of a STOLI deal.  The insurance companies don’t like STOLI because it waves a red flag for legislators to change some of the tax advantages of life insurance that are in place because it is a socially significant planning tool, not a gambling instrument.  They also want to avoid any potential litigation between the insured and investor and don’t like the idea of all of these policies remaining in force until death of the insured.

There are also some concerns for the potential insured:

  • Is the loan you are granted to pay the premium truly non-recourse?  What if death occurs during the contestable period and the claim is denied?  Can they come after you for the loan?
  • Any amount you receive for the sale of the policy may be taxable to you as income.  That may even include the amount of the loan that is recovered at death.
  • If you want to purchase more insurance in the future for your personal needs, the amount for which you are eligible may be compromised because of the STOLI policy being in force.
  • Will you be comfortable knowing that strangers will profit from your death?

If it sounds too good to be true….

Coming up…taking the emotion out of life insurance planning.

Leave a Reply