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Grim Reapers: Placing Bets on Your Death

It sounds like a script from "The Sopranos": Someone takes out a life insurance policy on your life -- then decides to order a "hit."

Of course, in real life that would never happen to ordinary people. Or would it?

A new life insurance practice -- not exactly a scam because it is legal, but dangerous -- could put you in the position of being a target. At the very least, it gives someone a tremendous incentive to see you dead sooner rather than later!

The practice has been called "SPIN" for speculator-initiated life insurance. It promises seniors upfront money to pay the first two years of policy premiums, plus a little extra cash, if they will take out a life insurance policy and then sell it to someone else.

My interest in this subject started with a recent email from a reader:

I am not really sure what to call it, but my mother (74 years old) has been asking about an insurance policy that has been offered to her and many in her community in Florida. A whole-life policy is taken out on her, and she is given a check for 1% of the policy. The insured person's estate gets the insurance policy if the insured passes within the first two years of the policy. Also, the estate has the option to buy the policy, but most do not because of the cost. Many seniors are pouring into it because of the 1% payout. It sounds too good to be a true, so is it a scam?

By the time "little old ladies" are being offered deals like this, you know something's wrong! Here's what's happening.

Life insurance "investors" look for seniors who are still insurable, but have no real need for more life insurance. The investors promise that if the senior will take out a life insurance policy with a face value of $1 million, they'll lend her the money to pay the premiums until the policy is past a two-year period.

The loans to pay the first year's premiums are considered "nonrecourse" -- so no one can come back to the senior to demand repayment. If the senior dies in the first two years, her named beneficiary gets the payout, less the loan amount.

After the two-year period, the senior can continue to pay the premiums from her own money -- which is unlikely, because these policies are huge, and the premiums could be $20,000 a year or more. Otherwise, the investor will buy the policy and take over paying the premiums, becoming the owner of the policy -- and the beneficiary.
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