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Deceptive Insurance Deals (STOLIs)

STOLI Promoters - These financially savvy insurance promoters are seeking to cash in.

"There's an evil cousin of legitimate life settlements out there," says Jack Dolan, vice president for media relations with the American Council of Life Insurers. "It's called 'Stranger-Originated Life Insurance,' or 'a STOLI arrangement,' and it's all about getting unsuspecting consumers to deceive the insurance industry, at great personal risk to the individuals."

Here’s how a STOLI works:

A STOLI promoter—generally a financially savvy person—approaches you about buying a hefty life insurance policy on yourself. Working independently of any insurance company, the third-party promoter promises you a big cash payment up front, will lend you money to pay the premiums for the first two years of the policy (the normal period in which an insurance company can contest a policy), and will then promise to forgive the loan.

In exchange, you're enticed to inflate the value of your assets on the insurance application, perhaps stating that you want to guarantee your family's security after your death. If the scheme plays out successfully, it results in a policy with a face value that can be worth several million dollars. At the outset, you must agree to transfer ownership of your policy at the end of the two-year period to the STOLI promoter and investors, who will receive those millions upon your death.

"STOLI promoters typically target well-to-do, older adults who aren't in the best of health," says Dolan. "However, these peoplearehealthy enough to pass a medical exam but probably don't have more than five or so years to live. The speculators are essentially wagering on your dying soon."

The success of a STOLI depends on a seductive approach that causes you not to examine it closely enough. But there are serious consequences if you participate in this scheme, many of which you may not see immediately. The possible ramifications include the following:

Taxes, Taxes, and More Taxes: You'll be taxed on the money the promoter gives you up front. And you could be taxed on the amount of the premium loan the promoter forgives. Some STOLI promoters pull out all the stops to court you into setting up a policy, even inviting you on all-expenses-paid luxury trips. But there is one vacation expense you'll have to pay: taxes.

Say Goodbye to Privacy: The sooner you die, the sooner the STOLI promoter and investors get paid. They'll all but knock on your door to check in on how you're doing.

No More Insurance: By inflating your assets to increase the value of your insurance policy, you've become over-insured and are unlikely to be able to buy any more policies.

You Could Get Caught: If your policy is found to be deceptive, the insurance company will likely rescind it, refund your premiums, and leave it at that. But it may also refer the case to state law-enforcement authorities for a fraud investigation and file an action against the STOLI promoter.

Here Comes More Trouble! Since the rescinded policy is in your name, the insurance company will refund the premiums directly to you—with interest. But remember who paid those premiums: the STOLI promoter. It won't be long before you're harassed to return the money, the interest, and even the up-front cash you were given.

This type of transaction is still fairly new. It’s unethical, its promoters are predatory, and it violates insurable-interest laws in every state and the District of Columbia. "We don't sell insurance policies to consumers for them to then sell them to speculators for profit," says Dolan, "but STOLIs have become a thorn in the side of the insurance industry. As a result, state insurance commissioners and state legislators acted very quickly to enact model laws to deter them, and STOLIs have since been outlawed in 28 states. But it takes time before the risks attached to these arrangements become part of the public consciousness. The bottom line is, if it sounds too good to be true, it is."

For more information about planning for long-term care, visit Decide to plan now for long-term care, create a plan that works for you, and share it with your loved ones. Let AARP help you. Decide. Create. Share.SM

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