Life Insurance Scams

Life Insurance Scams - 9/19/08

Jeff: A bad economy seems to multiply the efforts to sell risky investments. Here's a common gambit: You're approached by a life insurance salesman who tells you he will pay you to buy a life insurance policy, it will never cost you a dime, and you can make money. Does it sound too good to be true? Here to discuss this latest scheme is attorney Michael Solomon.

Jeff: Someone buys life insurance for me, and I make money. What's the catch?

Mike: Over the last few years something called "stranger owned life insurance" has been peddled by some insurance agents, especially to the elderly. There are several variations but here are the basics.

  1. An insurance salesman approaches an elderly person and says that investors will loan you 100% of the premiums to pay for life insurance. You may also get a payment up front. Some of these investors are the same hedge funds that have almost brought Wall Street to its knees.
  2. If you die in the next several years, your estate gets a portion of the insurance proceeds, and the investors get the rest. You win, the investors win, and the insurance company loses.
  3. If you survive for a period longer than a few years, you give the insurance policy back to the investors and you are off the hook.

Jeff: What is the risk to the elderly person?

Mike: There are several dangers:

  1. You might owe income taxes to the IRS.
  2. If you ever need insurance after joining this plan, you may not be eligible because there's a maximum on how much insurance you can buy.
  3. Strangers gain access to your private, personal medical information since they are investing in your health.
  4. Someone else owns a life insurance policy on your life and they don't wish you a long and healthy life. If the investor is named Tony Soprano, walk away from the deal.

Jeff: Is this legal?

Until last week this was legal in Ohio. Many states have passed laws prohibiting this type of sales of life insurance. Ohio passed a law effective September 11th that basically prohibits the sort of sale of stranger owned life insurance.

The new law does not prohibit what is commonly called viatical settlements in certain situations. Viatical settlement became common during the Aids crisis when people with that disease had life insurance and knew there were going to die. They would try to get an advance on the death benefit to help them through the last months of their lives. That is still legal. However it is clearly illegal now to buy a life insurance policy and then sell it to strangers just to make some extra money.

We have talked about this before. Be careful of the 'too good to be true' opportunities because they really are too good to be true.

Jeff: Thanks.