Earlier this year, Rosemary Bennett got a personal invitation in the mail for a complimentary consultation in her home with "Florida's foremost authority on advising affluent seniors."
She was intrigued with one of the "unique wealth creation and preservation strategies available only to affluent seniors" mentioned in the letter described as using "your insurability to make hundreds of thousands of dollars."
"For allowing him to come to our home to tell us about this investment, we were to receive a $200 gift card from one of five restaurants," the 68-year-old North Port resident wrote.
After seven weeks of voice messages and e-mails, Bennett says they still don't have the gift card. "We didn't lose anything but we didn't get what was promised either," she said.
I had a lengthy conversation with this individual who says he's been doing business for over 20 years without one complaint. Claiming the Bennetts were sent the gift card but admitting not tracking its use, he's agreed to send out another card for $100 as a compromise.
Rosemary, take the $100 and enjoy a nice dinner with your husband. But far more important for you and everyone reading today's column is to understand what this controversial "strategy" is all about. What appears to be a risk-free variation of a traditional life insurance policy settlement transaction may wind up costing many times the value of that free meal.
Why would an insurance salesman take so much time to meet with you one-on-one and offer $200 out of his pocket? For the thousands of dollars he'd earn in commissions by selling Stranger-Originated Life Insurance (SOLI).
He's looking for high-net-worth individuals -- usually over 70 -- in good health, able to qualify for lowered preferred rates. But this insurance policy isn't ultimately for them. They don't even want nor need it.
It's for total strangers wagering on the death of the insured; strangers who legally can't currently make the investment themselves because they don't have the required "insurable interest."
In a complex transaction, one stranger finances the premiums past a two-year "contestability period" and then another stranger buys the policy for less than the death benefit with the seller pocketing a nice profit with no cash outlay. Sometimes there's even an upfront cash bonus.
So what's wrong with that?
"For openers, investor-initiated life insurance is fraud," writes attorney and financial services consultant Stephen R. Leimberg. "It's unlawful for strangers to buy insurance on your life. Your participation makes you complicit in doing something illegal."
"These arrangements circumvent public policy requirements behind insurable interest laws," notes the Florida Office of Insurance Regulation on its Web site. "The Office is now in the process of assessing whether those arrangements require specific regulation, and, if so, what are possible
next steps for regulating such arrangements in Florida."
But even if STOLI transactions are not made outright illegal, there are other reasons to avoid them. Besides the divulgence of private confidential medical information or possibly being sued by an insurance company, Leimberg cautions about taxes that might have to be paid on the economic value of the insurance coverage as well as on the gain of the sale of the policy. There's also potential estate tax liability.
Before considering even a legitimate life settlement cash payout for more than the surrender value on a long-existing insurance policy, consult with an independent financial or estate planner and consider all options including accelerated death benefits.
There's a wealth of information on the Florida Department of Financial Services' "Safeguard our Seniors Task Force" Web site at www.flseniors.net under "resources."
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