A new type of insurance scam, the STOLI, preying on the elderly, has begun to spread from the geriatric heartlands of Arizona and Florida. The Stranger-originated life insurance (STOLI) scam works this way -- The scammer offers an elderly person a lump sum if they will buy a life insurance policy, at the scammer's expense, naming the scammer as beneficiary. Unfortunately, for the scammed person, such deals are illegal.

Seniors are hurt in several ways by this scheme. They may lose the ability to buy additional insurance. The money they receive from this illegal transaction is taxable, putting them in the double-bind many criminals encounter; pay taxes, thereby exposing the scam, or not pay taxes, and face tax evasion. They could also end up being charged with theft or sued by the issuing insurance company.

This scam should not be confused with viaticals or life settlements, however, which are legal. Viaticals, which were created when the AIDS epidemic was killing so many young men, allow a person, usually very ill or elderly, to receive a lump sum from a third party immediately based on a pre-existing life insurance policy, in return for the insurance that is paid out upon death.

The primary difference between a viatical and a STOLI (also known as a Speculator-initiated life insurance (SPINLIFE), Stranger-originated (SOLI) or Investor-originated (IOLI)) is that the latter is taken out at the behest of investors, with their money, as a way of speculating on the life span of the person being scammed. The speculator will sometimes construct an elaborate trust structure in an attempt to shield what they do from scrutiny.

Essentially, when someone willingly takes part in a STOLI, he is allowing himself to become a chip on the actuarial gambling table, a kind of anti-future, if you will. This is an image that demeans the insurance industry and one they very much want to quash. Besides, do you really want a bunch of shady characters waiting for you to croak so they can cash in? What if they run out of patience?

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