Wednesday, December 22, 2010

STOLI Revisited

When last we discussed Stranger Owned Life Insurance (STOLI), it was in the context of certain actors (in the business, not entertainment, sense) duping vulnerable seniors into buying, and then selling, life insurance policies. What was missing from that equation was, of course, the ultimate owner of those policies.

Turns out, it's not so much owner as owners:

"Life Partners, a fast-growing company in Waco, Texas, has made large fees from its life-insurance transactions ... Since its founding 19 years ago, Life Partners has sold its clients rights to the proceeds of 6,400 life-insurance policies with a total face value of $2.8 billion."

It works like this: Life Partners (LP) arranges to buy a policy from, say, John Smith, a 72 year old in apparently poor health (and please note that term "apparently;" we'll be coming back to it), and then sells shares in it to individual investors. The investors believe that their contribution will be leveraged by the large face amount on the soon-to-be-announced demise of the insured. They rely on LP's expert, a Nevada-based oncologist with a less-than-stellar track record when it comes to actually making the call. Remember that word, "apparently?" Well, here you go:

"Dr. Cassidy said Life Partners paid him a monthly retainer of $15,000, plus $500 for every policy bought by Life Partners clients ... Life Partners put a life expectancy of two years or less on the insured person in a third of the 297 policies it sold ... A total of 262 were still alive, of whom 64% had lived at least twice the life expectancy Life Partners gave them, and 34% at least triple."

Ooops. Seems to me, the investors would have been just as well off using Bob's Magic 8-Ball.

So who really loses here?

Well, probably not the insured: it's almost a safe bet that if LP wants to buy your policy, you should be prepared for a long and healthy life. And not LP's CEO, Brian Pardo, who "holds about half of Life Partners' stock and owns a Lear jet." And certainly not Dr Cassidy, who's made over $1 million since hooking up with the LP folks.

No, it would have to be the poor saps who bought into this idea, and forked over $50,000 (minimum!) to do so. Caveat emptor, indeed.
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