If you want to buy life insurance, the vast majority of companies are reputable, and you will get great service from them. However, as in any industry, there are a number of scam artists out there, but inside and outside of the life insurance business. So you need to be careful not to fall for any life insurance schemes. Here are some of the most common scams:
Stranger-owned life insurance
Many elderly or desperate poor people fall for this scam. The way it works is that they either purchase a life insurance policy, or turn over a life insurance policy to an “investor” in exchange for some money upfront. In many cases, the person insured may not even have to pay any money for the premiums.
The scheme usually pays for the first two years of premiums, to get around state laws on insurable interest. And if the person dies within the first two years, their own beneficiaries – usually family members – will receive the proceeds from the policy. After the two years, the person insured can either pay back the money loaned, or the investor can take over the policy.
STOLI, as it is known, is illegal in some states. It is something people should avoid, especially since they could get into hot water with tax issues related to accepting payment for the STOLI.
Seniors are also frequently victimized by this practice. With churning, a current life insurance policy is cashed out by an insurance agent and replaced with another one. One way this works is that the owner of the life insurance policy is promised a new, bigger life insurance policy for virtually the same premium. But what really happens is that the cash value and the death benefit for the old policy is drained, and then, when the new policy’s actually high premiums are not able to be made, the customer could be stuck without any life insurance.
Here’s what you need to know: as you age, you are not going to be able to buy new life insurance for little or no cost. And that somebody who approaches you with such a scheme with buying a new policy when you already have one could be a problem, if they want you to cash out the old policy.
Life insurance twisting is very similar to churning, except that the agent may get the second life insurance policy from a different company.
In summary, if something seems too good to be true, it probably is.
Lisa Swan writes for a variety of websites, including BestLifeInsuranceDeals.com.