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A stranger who expects to receive lots of money from an insurance company when Grandpa dies early will obviously not think about safeguarding Grandpa’s life.
Seniors and their families are informed of an insurance scheme that may victimize seniors and expose them to financial risks and potential legal liabilities. This scheme has become commonly known as "Stranger Originated Life Insurance" (STOLI) or "Speculator Initiated Life Insurance" (SPINLIFE).
What is STOLI or SPINLIFE?
The STOLI or SPINLIFE scheme typically starts like this: Investors or life insurance agents may approach seniors and encourage them to purchase a life insurance policy, which will then be sold to an investor two or three years later. The seniors will be assured that the life insurance purchase itself is "free," "risk-free" or "no-cost." The seniors do not have to pay premiums and are promised an upfront cash bonus.
There are also unscrupulous operators pitching "longevity survey" schemes, where seniors are paid a sum to fill out a "longevity survey" and where the seniors unwittingly reveal their private medical information to unknown third parties. This information is then used to purchase life insurance for investors who wish to wager on the senior’s death.
What holds the scheme toget her is a transaction called a "life settlement." A life settlement is a transfer of an ownership interest in a life insurance policy to a third party for compensation less than the expected death benefit under the policy.
The third party then makes any required premium payments and holds the policy until the death of the insured, at which time the third party is paid the death benefit under the policy. For example, Grandpa owns a life insurance policy for $5 million. Grandpa then sells this policy to Jane Doe (a complete stranger) for $200,000. Jane Doe now owns the policy and will continue to pay the insurance premiums.
When Grandpa dies, Jane Doe collects the death benefit under the policy.
Life settlements in themselves are not bad and may even be a viable option for some seniors. In fact, life settlements were created in the context of a life insurance policy that was originally purchased to benefit persons (for example, a spouse or a child) who might be left destitute at the death of the family wage earner. However, STOLI or SPINLIFE schemes involve investors soliciting the original purchase of the insurance for the sole purpose of an eventual sale to them.
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