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.
In exchange for taking out the life insurance policy, the senior is promised a payment, such as the 1% mentioned in the letter above. Well, 1% of a $1 million policy is $10,000 -- a nice piece of change and hard to resist.
After the first two years, the investor buys the policy and keeps paying the premiums until the senior dies. Obviously, the investor is hoping that the senior dies sooner, rather than later. Then the investor will collect the $1 million.
Sometimes the investor sells the policy to another "investor," or several more. Ultimately, the senior never knows who owns this policy on her life. That's enough to make anyone queasy: Someone is walking around hoping you'll die so he can collect a million dollars!
It's not illegal to sell your insurance policy. In fact, if you've held a cash value life insurance policy for a few years, you've built up a "surrender value," which the insurance company will pay if you decide you don't need the insurance any more.
But often, these speculator/investors will offer to pay you more than the insurance company would give you. How much more? All they have to do is figure out the time value of the premiums they'll be paying on your policy until your death, and when you're likely to die. The eventual payoff to them is huge, especially if eventual is sooner, rather than later.
The insurance companies either don't know, or don't care, that this is going on. They get to book more policies and collect more premiums.
Before biting on this deal, ask yourself whether that cash payment is worth wondering if someone at the mall wants you to slip on a banana peel!
If you need life insurance, buy it. But you, your children or your irrevocable insurance trust, should own the policy. At least you know (hopefully) they're not betting against your life! And that's The Savage Truth.
Terry Savage is an expert on personal finance and also appears as a commentator on national television on issues related to investing and the financial markets. Savage?s personal finance column in the Chicago Sun-Times is nationally syndicated, and she released her fourth book,
The Savage Number: How Much Money Do You Need?
in June 2005. Savage was the first woman trader on the Chicago Board Options Exchange and is a registered investment adviser for stocks and futures. A Phi Beta Kappa graduate of the University of Michigan, Savage currently serves as a director of the Chicago Mercantile Exchange Corp. She also has served on the boards of McDonald's and Pennzoil.