Beware Life-insurance Investors Bearing Gifts

This post focuses on the risks of a life insurance “investment.”  At a recent cocktail party, an acquaintance enthusiastically shared a proposal he had received from a life insurance investor group.  They offered to help him purchase a large life insurance policy (on his own life), then to repurchase it from him within two years.  Since the proposal required no money down, and his two years of premiums would be paid by the investor group, the promised cash payout seemed too good to be true.  It became very clear that my acquaintance was referring to a risky “SPIN-LIFE” transaction.
SPIN-LIFE transactions are not only unconventional but violate the insurable interest laws in many states.  Participants may be exposing their heirs, and/or their estate to significant legal liabilities and financial burdens.  SPIN-LIFE schemes, which are becoming more common, are perversions of a legitimate segment of the life-insurance market called the life settlement market, which has grown dramatically over the last decade.  (We will examine the life settlement market in a future posts.)
In today’s economic environment, individuals may feel greater temptation to pursue unconventional sources of income.  While SPIN-LIFE transactions may be enticing sources of cash, they violate insurable interest laws in many states and individuals should exercise caution regarding these transactions.  Ironically, once bitten, twice shy may not apply to financial pain. In trying times, we may be more prone to considering riskier, unconventional sources of income.      Back to the cocktail party—after learning about some of the risks associated with a SPIN-LIFE transaction, my acquaintance’s enthusiasm waned.  Just as I encouraged him to seek expert guidance if he decided to proceed with the SPIN-LIFE transaction as a source of income, so I encourage you: beware life-insurance investors bearing gifts.