Thursday, April 24, 2014

No. 45: STOLI and a Distressing Telephone Call

Recently I received an e-mail from a woman in Pennsylvania who saw one of my blog posts about stranger-originated life insurance (STOLI). She said her elderly mother in Florida was victimized in the same manner and by the same parties I mentioned in the blog post she saw. I invited her to call me. She did so, and the conversation was distressing.

The caller said her mother was approached in 2008 by an insurance agent who sold her mother on the idea of applying for a life insurance policy with a face amount of several million dollars. The agent said the policy would cost her mother nothing and she would receive more than $100,000 when the policy was sold into the secondary market two years later. Her mother took a physical examination and signed various documents. Her mother now has neither the policy nor copies of the documents. The policy is in the hands of the premium finance company, which is dunning her mother for money she does not have. Also, her mother is troubled by the big policy in force on her life.

I will speculate about what transpired, based on many STOLI cases I have seen. The mother probably signed an insurance policy application, trust documents, and loan documents. She probably signed all of them in blank without looking at them and without any understanding of what she was doing. She probably was given no copies of anything. The agent probably filled out the application and the agent's supplement with false statements about the mother's net worth, the mother's income, the financing of the premiums, the purpose of the insurance, and the intent to sell the policy in the secondary market. The purpose of the false information was to hoodwink the insurance company into issuing the policy. The company probably issued the policy without an adequate investigation and the agent pocketed a large commission. Deterioration of the secondary market probably made it impossible to sell the policy at the end of two years. Thus the policy fell into the hands of the premium finance company after the premium loan went into default. Now the mother is being dunned by the finance company, and a large policy remains in force on her life in the hands of a party that has no insurable interest and, indeed, has a strong financial interest in her early death.

During our telephone call, I mentioned the insurance regulators in Florida. The caller said she had already contacted the Florida insurance regulators, who had referred her to a Florida fraud agency. I made another suggestion to her, and asked her to keep me apprised of developments.

I asked the caller how her mother could be taken in by such a scam, and whether her mother had concluded that the proposition was too good to pass up. The caller said that is exactly what happened. Thus her mother was not aware that propositions too good to be true usually are false.

Insurance regulators, securities regulators, and law enforcement authorities try to prevent the public from being victimized by wrongdoers. However, these governmental agencies cannot shield everybody in a timely manner. In other words, it is impossible to protect all gullible consumers from all smooth-talking con artists. That is why I found the telephone conversation distressing.