Too good to be true.
Is life insurance a get-rich-quick tool? Has someone promised you just this?
They tell you, all you have to do is buy it, keep it for a couple years, then sell it.
Then the money rolls in. Easy, right? Nope – not easy at all.
This is called stranger-owned life insurance (STOLI)* and is highly looked down upon by most insurance companies and even illegal in many states.
What is stranger-owned life insurance?
We’re glad you asked.
Stranger-owned life insurance is very complex and the explanation here just scratches the surface.
Stranger-owned life insurance is when you buy life insurance with the intent to sell it to someone else (an investor – aka ‘the stranger’) in the future. This stranger has no financial interest in you. They are someone you don’t have a financial relationship with such as a spouse or child.
This new buyer does not depend on you for your income. They will not suffer financially if you die and your income is lost.
The keyword in identifying stranger-owned life insurance is ‘intent’ on selling in the future. If you buy life insurance only with the intent to sell it in a couple years for profit, you are participating in a stranger-owned life insurance scam.
Life insurance is bought to protect those you love, your family who depends on you financially, not strangers. In most cases, it is acceptable to sell your life in the future (life settlement) if it makes financial sense, but life insurance is not meant to be purchased with the intent to sell.
Life insurance should be purchased with the intent to protect.
The triangle of players in this game.
Think of stranger-owned life insurance like a triangle: a triangle between you, your insurance agent, and the person who buys your life insurance policy (the investor – aka ‘the stranger’).
- You: buy the life insurance policy.
- Your agent: sells you life insurance policy.
- The stranger (investor): buys your life insurance policy from you after you have had it for a couple years.
So first, you buy a life insurance policy from your agent. Then your agent helps you sell that policy to a stranger (investor).
Why would you do this you ask? Well, the insurance agent promises you big money.
They tell you that after you buy the life insurance policy, you can sell it for a hefty profit. You can’t sell it right away though. You have to keep it for a few years, making the monthly payments.
But then your insurance agent makes you another promise, one that sounds too good to be true. The stranger who plans to buy your insurance will make those monthly payments for you. What could be better than that, right?
Now you feel like you are getting ‘free’ life insurance. And you basically are if you die within the 2-3 years when the life insurance is still yours, before you sell it.
What’s in it for them?
Money of course
What’s in it for the new owners of your life insurance policy (the strangers)? When you die, these strangers (investors) get to keep all of your insurance money (death benefit). The people who bought your life insurance policy are basically making a wager on your life. The longer you live, the more monthly payments they have to make to the insurance company.
The sooner you die, the more money they will make.
What’s in it for the agent who sold you your life insurance policy? Bigger commission checks.
To make a big profit, the insurance agent who sells you the policy will often lie about your income on the insurance application, making your worth sound much higher than it is. This is so you can buy more life insurance. If they can get you approved for a $1 million policy, then that agent will make more money (a bigger commission check) than if you only buy a $500,000 policy. They want you to get the most expensive policy you can. This is so they get the largest commission check they can.
How do you suffer?
You may be helping your agent break the law in your state. Buying life insurance with the INTENT of selling it for profit is illegal in some states.
You are helping the insurance agent defraud the insurance companies. The insurance company sold the insurance policy to YOU, not the stranger. The insurance company looked at your medical history and financial information to determine the price of the policy, not the stranger’s.
You may not be able to get another policy at the same time to protect your family. If the life insurance company thinks you have more life insurance than you need, they might not allow you to buy another policy. Do you want to get a 2nd policy to cover your family in addition to this get-rich-quick policy? Well, think again. That stranger-owned life insurance policy might not allow you to buy a 2nd policy.
You may not be able to get life insurance again due to your health. If you bought your stranger-owned life insurance when you were healthy, sold it for a profit, then had a had a health decline, the insurance company will most likely raise your rates considerably on a new policy. Or even worse, you may no longer qualify for life insurance at all.
You may not be able to get life insurance again due to the lies on your application. Insurance companies do not like to be lied to, and with good reason. They set your monthly payment and the amount of life insurance you qualify for based on your personal information, such as health and net worth. They don’t care if it was the agent who put the lies on your application and not you. You may be blacklisted for lying, and insurance companies share information regarding lies on applications.
You may actually lose money. The agent and strangers (investors) who are participating in the stranger-owned life insurance scam want to make the most money as possible. This means they will offer you the lowest possible price to buy your life insurance. If you do decide to sell, doing it through a trusted financial advisor and getting more than one offer may get you more money.
Tax consequences. The payment you receive may be taxed as normal income. This may negatively affect your overall finances.
You are allowing strangers to profit from your death. You die – they get paid. The faster you die – the more money they make. What if they don’t want to wait? Hopefully you won’t die a little sooner than nature intended.
Are you a target?
Insurance agents who target seniors for their stranger-owned life insurance scams are looking for 3 specific features.
- People who are between 70 and 85 years old.
- People who are healthy enough to get life insurance but not too healthy. They need you to die in about 3-6 years for maximum profit.
- People who are able to qualify for at least $1 million dollars of life insurance or more (but don’t worry, they will happily sell to anyone if they have the chance).
A real-life, stranger-owned life insurance scam
Among other transgressions, Daniel Carpenter, 62, of Simsbury Connecticut (and his agents) defrauded more than $12 million in commissions from insurance companies. He lied to the insurance companies to get them to sell policies to his elderly clients, policies the clients may not even qualify for. He lied about the fact that strangers (third party investors) were actually making the monthly payments. He lied about his conversations regarding the insurance policies. He lied about his clients’ net worth. He lied about the purpose of the life insurance purchase.
He did this by targeting elderly people to sell them ‘free’ life insurance policies. Carpenter promised his clients 2 years of ‘free’ life insurance if they let him control their policies and sell them later. He promised his clients that when he sold the life insurance policies, they would get some of the profit.
An insurance company uses the information on the insurance application to decide whether they will sell the policy to a client and how much that policy will be. Carpenter (and his agents) lied on the life insurance applications, so the insurance companies were selling policies based on lies.
If the insurance companies had known about the truth, they may have not sold the life insurance policies in the first place.
On top of all this, one of his clients died before they were able to sell their life insurance policy, and Carpenter kept the money! His client’s family (or other beneficiary) should have received that money, not him.
Don’t be deceived
Carpenter made promises of easy money to his victims.
Did his clients know they were participating in a potentially unscrupulous plan? Probably not.
Did his clients know he was outright lying to the insurance companies on their behalf? Probably not.
Did his clients know they were putting themselves at risk for not getting life insurance in the future? Probably not.
Did his clients know that they might actually make more money if they had just held on to the insurance policies themselves and sold the policies through a trusted financial advisor rather than letting Carpenter completely control everything? Probably not.
His Turn to Pay
Carpenter will be sentenced in August 2016. He is already in jail serving a 36-month sentence for previous crimes. He will also need to pay a $100,000 fine for his crimes and may even face up to 20 years or more in prison!
Avoiding stranger-owned life insurance scams
- Do not allow someone you don’t know or has no financial dependency on you buy a life insurance policy on you in exchange for a lump sum of money.
- Beware of ‘free’ life insurance.
- Check references on your insurance agent and company.
- Don’t sell your current life insurance policy if you feel pressured or rushed.
- Don’t lie about your income or worth on your insurance application. If an agent wants you to lie, they are committing fraud.
- Don’t buy more life insurance than you need.
Still want to sell your life insurance policy?
- Work with a settlement entity in your state and a trusted financial advisor.
- Understand all the tax fees and how those fees will affect your finances before you sell.
- Get more than one offer. You may be able to make more.
- Always get a written offer from the buyer.
- Are you selling because you need the cash or can’t make your payments any more? Get financial advice before selling. You may have better options than selling.
- Get a trusted family member or friend involved. They may help spot fraud.
- The money you receive from the sale should be given to you in one lump sum. Be wary of anyone who promises to send you payments.
And, as Jim Poolman, the executive director of the Indexed Annuity Leadership Council says, “Life insurance products – whether they are term life, whole life or another variety – are meant to be financial protection for your heirs. They are not meant to be investment products and shouldn’t be regarded as such, because they will never live up to products designed as investment vehicles.”
If it sounds too good to be true, it probably is.
*aka: stranger-originated life insurance
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This information is provided for general consumer educational purposes only and is not intended to provide legal, tax or investment advice.