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Senior insurance SPIN has scary implications

Updated: May 3, 2013 12:14PM

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 -- could put you in the position of being a potential 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 life:" Speculator Initiated Life Insurance. It promises seniors up-front money to pay the first two years of policy premiums, plus a little extra cash, if they will just take out a life insurance policy, and then sell it to someone else.

My interest in this subject started with a recent e-mail from a reader:

"My 74-year-old mother and many others in her Florida retirement community are being urged by an investor to buy a life insurance policy from a well-known national company. If she buys the policy, and names the investor as the beneficiary, the investor will give her a check for 1 percent of the policy.

"Her estate gets the death benefit if she passes within the first two years of the policy.

"Many seniors ar buying this policy, because of the 1 percent payout. It sounds too good to be true, so is it a scam?"

Something's wrong here

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, the investor will lend them the money to pay the premiums for the first couple of years -- until the policy is past the two-year period in which the insurance company could contest a payout.

At that point, the senior can continue to pay the premiums from his or her own funds -- unlikely, because these policies are huge, and the premiums could be $20,000 a year or more. Or else the investor will buy the policy and take over paying the premiums, becoming the owner of the policy -- and the beneficiary.

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

In exchange for providing this service, the senior is variously promised a fee, such as the 1 percent mentioned in the letter above. Well, 1 percent of a $1 million policy is $10,000 -- a nice piece of change.

After the first two years, the investor buys the policy, and keeps on 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 re-sells the policy to another investor -- or several more. Ultimately, the senior never knows who owns this policy on his or her life!

Doesn't that make you queasy? Someone is walking around out there, hoping you'll die so he or she can collect a million dollars!

It's not illegal to sell your policy. In fact, if you own a cash value life insurance policy, you might have built up a "surrender value," which the insurance company will pay if you want to cash it in.

But these speculator/investors 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, or when you're likely to die. The eventual payoff to them is huge, especially if eventual is sooner rather than later.

Insurers like being ignorant

It's possible the insurance companies might not know this is going on, but 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, or your children, or your irrevocable insurance trust, should own the policy. At least you know they're not betting against your life! And that's The Savage Truth.

Terry Savage is a registered investment adviser. Distributed by Creators Syndicate.

Copyright © Terry Savage Productions

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