TAG | insurance scam
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In an article from InvestmentNews.com, May 29, 2011, Bruce Kelly writes that Neal Smalbach was fired by a broker-dealer in 2008 for selling securities while he was unregistered, an infraction that got him suspended by the Financial Industry Regulatory Authority Inc. (FINRA) for six months, according to the organization’s BrokerCheck system. It was the second time that a securities firm had let him go. Though he no longer had a securities license, Mr. Smalbach still had a license to sell insurance, and made good use of it — at least for himself, authorities said.
Kelly writes that on April 29, Mr. Smalbach was arrested in Florida by the Pinellas County sheriff and charged with one count of insurance fraud and one count of organized fraud. Each count carries a maximum of five years in prison, along with a potential $5,000 fine. The charges of insurance fraud against Mr. Smalbach, who also has 37 pending customer disputes from his time as a broker, according to BrokerCheck, highlight a persistent problem in the investment advice business:
Registered representatives who permanently or temporarily lose their license to sell stocks, bonds and mutual funds often retain a license to sell insurance.
Although state agencies that regulate insurance agents and securities brokers try to work together to keep an eye on brokers who get fired from either side of the industry, regulators are sometimes limited in their authority because of a lack of information sharing about reps and agents, observers said.
A common criticism among registered reps is that insurance agents who lose a license to sell securities products often sell equity-indexed annuities, an insurance product that is nonetheless marketed as an investment that can compete with a mutual fund or variable annuity.
“It’s been an issue, and still is, among states,” said Joseph Borg, director of the Alabama Securities Commission. “If you’ve been kicked out of one end of the financial markets, you probably don’t need to be in another.”
According to the InvestmentNews.com article, Mr. Smalbach, 48, was selling mortgage insurance policies that promise to pay the balance of a policyholder’s mortgage in the event that he or she dies, according to Jeremy Powers, an assistant state attorney in Florida’s Fifth Judicial Circuit. But instead of mortgage insurance, Mr. Smalbach’s clients were, in fact, sold whole-life policies that were worth no more than $20,000.
“Somebody who’s had the level of problems that [Mr.] Smalbach appears to have had would create a risk for consumers,” Mr. Powers said. “The activities alleged in this case are pretty serious and had the potential to create multiple hundreds of thousands of dollars in victim losses.”
Smalbach, whose sales practices were profiled last month by the St. Petersburg (Fla.) Times, serve as a backdrop to efforts by lawmakers in Washington and regulators across the country to create a single fiduciary standard for investment advisers, registered reps and insurance agents. This year, a law went into effect in Florida that gives the state’s Department of Financial Services the power to revoke an insurance agent’s license immediately if the agent has his or her securities license revoked.
“Fraud is fraud,” said Nina Ashley, a department spokeswoman.
Kelly reminds us that when confronted with a broker whose securities license had been pulled — but who maintained an insurance license — regulators’ hands are, at times, tied. To take actions against a broker’s insurance license, Ms. Ashley said a specific insurance violation has to be found. “That didn’t always exist,” she said.
Florida already has used the new law to revoke the insurance license of a broker who misrepresented information when selling securities to a senior citizen, Ms. Ashley said. In February, the Florida Office of Financial Regulation permanently barred Jeffrey Donner on charges that he failed to disclose to clients that their accounts would automatically be billed advisory fees of 30% annualized, according to a statement from the agency. Approximately $40,000 in management fees were deducted from clients’ accounts. While Mr. Donner neither admitted nor denied the findings, Florida regulators revoked his insurance license this month according to the InvestmentNews.com article.
THEY ARE FINDING LOOPHOLES
We’ve learned that Mr. Smalbach, however, still has a license to sell insurance products such as life and health policies, and variable annuities, according to the Florida Department of Financial Services’ website.
The broker in question exploited another loophole in the law when he sold stock in a firm called Transfer Technology International Corp., whose shares are currently listed at less than a penny a share. At least a dozen elderly investors, some in their 80s and 90s, bought nearly $1 million of the stock from Mr. Smalbach, according to the St. Petersburg Times. Although he didn’t have a securities license, Mr. Smalbach was an employee of Transfer Technology and could sell shares in the company to accredited investors legally, the newspaper reported.
THEY ARE SMOOTH OPERATORS
Bruce Kelly writes that one longtime client of Mr. Smalbach who invested in the Wesley Chapel, Fla.-based company was Bob Fox, 78, of Sebring, Fla. A client of Mr. Smalbach’s for over a decade, Mr. Fox said he has lost $100,000 in his Transfer Technology investment.
“He was a really smooth talker,” Mr. Fox said, adding that Mr. Smalbach often hurried him through paperwork when buying an investment.
Mr. Smalbach’s former accountant, Robert Ferreira, corroborated Mr. Fox’s statement said the ex-broker often rushed clients through the process of buying investment products, including variable annuities.
“His method was to say, “Sign here, fill in this and that — I’m in a hurry and will fill in the rest at the office,’” Mr. Ferreira said.
If you or a family member have purchased policies through Neal Smalbach or other brokers and experienced a similar situation, contact an insurance fraud attorney for a free consultation on how to potentially recover your investment losses. To speak with an attorney, call 888-760-6552, or visit stockmarketlawsuit.com.
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The following are some of the deceptive practices involving insurance sales:
*The definition of “twisting” insurance is when the insurance agent, for the purposes of generating his or her commission, persuades the client to lapse, surrender, or otherwise terminate an insurance product and replace it with another product that provides little or no economic benefit to the client. Often, the accumulated cash value of an older policy is used to mask the true cost of the new policy, allowing the agent to provide a favorable (but misleading) comparison.
*”Churning,” sometimes referred to also as twisting in the insurance industry, is an attempt by an unscrupulous agent from an insurance company to cancel your existing policy and replace it with a new one, drawing down your cash value (called “juice” in industry jargon) to pay for it. This activity generates additional commission for the agent and may result in your having to pay more down the line.
*”Vanishing premiums” refers to the inflated claims about the length of time a policyholder will need to pay premiums, such as “you only have to pay premiums for seven years, and then the policy will pay for itself.” Unfortunately, many consumers who were sold vanishing premium policies in the 1980s and 1990s later found they needed to pay more premium dollars to keep their policies from lapsing.
Before it was made illegal, some insurance agents used a sales pitch for universal life insurance that suggested the premiums could vanish.
The pitch went like this:
You start out by putting a large, lump sum into the universal life policy. The policy has the potential for making money, much like an investment (but it is illegal for an agent to sell life insurance by calling it an investment). The company may pay interest, if the company has a good year. If the company does have a good year, the percentage of interest could be very high. If you left the interest and dividends in your policy to build up with your cash value after a few years, you could have enough cash value in the policy to pay the premiums.
The “vanishing premiums” scenario depended on three big “IFs:”
Only if the company has very good years. Only if the company pays high dividends. Only if you do not withdraw cash value.
*The term “sliding” means an agent slips you extra coverage you didn’t ask for — but do pay for. This can easily add $100, $200 or more to your premium. The agent says it’s part of a “package,” or won’t mention the coverage at all. The motor club memberships, accidental death coverages and guaranteed renewable life insurance are three policies that agents sometimes sell to policyholders without their knowlege.
The primary motive in these scenerios is financial profit. These practices not only are misleading and unethical, but can be illegal.
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In an April 26th, 2011, article from InvestmentNews.com, Darla Mercado writes that attorneys have set their sights on life insurers as state regulators investigate the carriers for their failure to pay out death benefits or submit the money to the state in a timely fashion, allegedly while still collecting fees in some cases, and leading the way is California’s controller and insurance regulator, which announced jointly a subpoena and investigative hearing of MetLife Inc.’s practices on paying death benefits.
Ms. Mercado goes on to say that the preliminary findings from a three-year audit by the state revealed that for 20 years, the carrier failed to pay benefits to named beneficiaries or the state after learning that a customer had died. MetLife’s hearing has been set for May 23. That same audit, which covered 21 life insurers, led to a settlement between John Hancock Financial Services Inc. and California on Friday. That day, Florida’s Office of Insurance Regulation announced a May 19 hearing on the same topic. That office also had subpoenaed MetLife and Nationwide Life Insurance Co., asking that the companies bring representatives to discuss the carriers’ practices.
The regulatory activity has garnered the attention of plaintiff’s attorneys, who are watching the drama unfold and expect some litigation fallout as a result. According to the InvestmentNews.com article, the key legal question is what exactly were the insurer’s responsibilities in performing the due diligence to find the beneficiaries. Carriers use the Social Security Administration’s death master list database for reference.
The beneficiaries of these policies are supposed to submit a claim for the death benefits, but if a carrier doesn’t hear from a beneficiary and has information on hand to show that an insured person has died, then at what point does the company escheat the money to the state?
It was noted that aside from following regulatory and statutory requirements, the insurer used its electronic death master file in 2006 and 2007 to identify individual life insurance policies for which a death benefit was due but no claim had been filed to date. The carrier will expand its use of the electronic death master file to identify potentially payable policies this year.
Depending on applicable state law, when beneficaries can’t be located within 3 to 5 years after the company receives notice of a death, the policy proceeds are considered unclaimed and go to the appropriate state. MetLife escheated $51 million to the states in 2010.
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Steven M. Brasner, an agent with Infinity Financial Group LLC in Davie, Fla., was arrested April, 2010 and charged with 22 counts of grand theft, insurance fraud and aggravated white collar crime.
Axa Equitable Life Insurance Co., which sued Mr. Brasner in 2008 in connection with this case, had notified Florida’s state regulators of the suspicious policies. Axa notified the regulators in adherence to state rules that require carriers to report suspected fraud activity.
According to an InvestmentNews.com article, officials in Florida, including the state finance chief and attorney general, charged that Mr. Brasner created a scheme to sell policies taken out on the lives of senior citizens on the secondary market, then identified his victims and scammed them into buying a policy. As part of the scheme, he falsified the clients’ net worth. Though it’s legal to sell policies over the secondary market, purchasing insurance with the express purpose of selling it violates state insurable interest laws.
Brasner made more than $1.6 million in commissions on the policies, based on some $78 million in total death benefits, according to regulators.
Florida State officials also claim that Mr. Brasner told the senior clients that he would pay them between 3% to 5% of the face value of the life insurance policies following the two-year contestability period when the contracts were sold over the secondary market. He also allegedly told the elderly Axa clients that they wouldn’t have to pay for the premiums out of pocket.
We stand up and fight for the rights of consumers.
Representing Insurance Fraud Victims in Federal Court, State Court and before the Financial Industry Regulatory Authority (“FINRA”).
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John Hancock to Settle Calif. Death Benefit Investigation Worth $20M; Ongoing Investigation in Florida
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In an April 22, 2011, article on Investmentnews.com written by Darla Mercado, she writes that California announced a settlement with John Hancock Financial Services Inc. after an investigation revealed that the carrier failed to deliver deceased clients’ death benefits promptly to the tune of $20 million.
This announcement follows a three-year audit investigation of 21 life insurers performed by the state’s controller, John Chiang, in an attempt to determine whether the carriers were complying with California’s unclaimed property laws.
The article goes on to say that those escheatment laws require businesses to submit lost or abandoned financial accounts to California after three years of inactivity in order to protect clients’ property from getting lost during mergers or bankruptcies, or from being depleted by fees. Other states have similar unclaimed property laws.
“While John Hancock is the first to be held accountable, it will not be the last,” Mr. Chiang said. “I am prepared to pursue all actions necessary — including litigation — to bring the rest of the industry into compliance.”
Investmentnews.com reported that California’s investigation revealed that life carriers failed to pay up death benefits to clients’ beneficiaries. Instead, they would draw from the policies’ cash reserves to pay premiums even after the client had died, according to the controller’s announcement. Once the policy was fully depleted, the insurers would cancel coverage.
The investigation also revealed that carriers did not routinely cross-check the owners of the dormant accounts with government databases listing the names of the dead. In other situations, the carrier knew the policy owner was dead but still failed to tell the beneficiaries, according to Mr. Chiang’s office.
Ms. Mercodo reported that in one of the John Hancock cases, the carrier issued a policy in 1963 to a client who died in 1999. John Hancock allegedly continued to pull premium payments from the cash reserves until the policy was canceled in 2009. Eleven years after the customer’s death, the carrier still hasn’t paid the beneficiaries or sent any of the death benefits to the state controller’s office, according to the controller.
In the Investmentnews.com article we learn that the same activity occurred with annuity contracts, according to Mr. Chiang’s office. John Hancock issued a contract in 1991 to a client who died four years later. The insurer’s files reveal that the deceased client’s mother called in 2002 to report the client’s death. Even though John Hancock noted in its files in 2005 that the client had died, the company allegedly didn’t pay out the death benefits to the client’s estate until 2009, the investigation revealed.
It was reported that aside from reuniting owners or their heirs with more than $20 million of death benefits and matured annuities, John Hancock also will have to restore the value of some 6,400 affected accounts going back to 1992 and pay California compounded interest of 3% on the value of the amounts held from 1995 or from the date of an affected policy owner’s death, whichever is later.
“John Hancock is outraged by the unfounded allegations and characterizations contained in today’s press release by the California controller’s office,” the insurer said in a statement. “Indeed, by its actions today, California has violated the very agreement that it negotiated and signed with John Hancock.” The insurer denies any allegations or characterizations of wrongdoing.
Carriers’ compliance with unclaimed property laws also will be the topic of a May 19 hearing in Florida, hosted by that state’s Office of Insurance Regulation. The office subpoenaed Metropolitan Life Insurance Co. and Nationwide Life Insurance Co, asking that the insurers send representatives to discuss the carriers’ practices.
It was reported that an investigation in Florida revealed that some carriers use the Social Security Administration’s death master file to find out about a client’s death and stop annuity payments, but fail to use that information to look into claims for death benefit. The state is a part of a national task force looking into carriers’ claims settlement practices.
“This appears to be an industry practice,” said Jack McDermott, a spokesman for Florida’s Office of Insurance Regulation. “We’re looking at a multitude of companies — some of the largest ones in the country.”
“Nationwide will review the information from the Florida Office of Insurance Regulation and will cooperate with their inquiry,” said spokesman Chad Green. “We stand by our business practices and are committed to serving the needs of our customers.”
“MetLife always fully cooperates with inquiries from regulators,” said spokesman John Calagna. “We will address whatever questions the Florida insurance department may have regarding this matter.”
Call a Securities Arbitration Lawyer for a free consultation on how to recover your investment losses. To speak with an attorney, call 888-760-6552, or visit www.stockmarketlawsuit.com. Soreide Law Group, PLLC., representing investors nationwide before FINRA the Financial Industry Regulatory Authority.
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In an article from the Financial Industry Regulatory Authority (FINRA)’s website, they write that the sales of equity-indexed annuities (EIAs)—also known as “fixed-indexed insurance products” and “indexed annuities”—have grown considerably in recent years. Although one insurance company at one time included the word “simple” in the name of its product, EIAs are anything but easy to understand. One of the most confusing features of an EIA is the method used to calculate the gain in the index to which the annuity is linked. To make matters worse, there is not one, but several different indexing methods. Because of the variety and complexity of the methods used to credit interest, investors will find it difficult to compare one EIA to another.
The FINRA article states that before you buy an EIA, you should understand the various features of this investment and be prepared to ask your insurance agent, broker, financial planner or other financial professional lots of questions about whether an EIA is right for you.
What is an Annuity?
An annuity is a contract between you and an insurance company in which the company promises to make periodic payments to you, starting immediately or at some future time. If the payments are delayed to the future, you have a deferred annuity. If the payments start immediately, you have an immediate annuity. You buy the annuity either with a single payment or a series of payments called premiums.
Annuities come in two types: fixed and variable. With a fixed annuity, the insurance company guarantees both the rate of return and the payout. As its name implies, a variable annuity’s rate of return is not stable, but varies with the performance of the stock, bond and money market investment options that you choose. There is no guarantee that you will earn any return on your investment and there is a risk that you will lose money. Unlike fixed contracts, variable annuities are securities registered with the Securities and Exchange Commission (SEC).
What is an Equity-Indexed Annuity?
EIAs are complex financial instruments that have characteristics of both fixed and variable annuities. Their return varies more than a fixed annuity, but not as much as a variable annuity. So EIAs give you more risk (but more potential return) than a fixed annuity but less risk (and less potential return) than a variable annuity.
EIAs offer a minimum guaranteed interest rate combined with an interest rate linked to a market index. Because of the guaranteed interest rate, EIAs have less market risk than variable annuities. EIAs also have the potential to earn returns better than traditional fixed annuities when the stock market is rising.
What is the Guaranteed Minimum Return?
When EIAs were first sold in the mid-1990s, the guaranteed minimum return was typically 90 percent of the premium paid at a 3 percent annual interest rate. More recently, in part because of changes to state insurance laws, the guaranteed minimum return is typically at least 87.5 percent of the premium paid at 1 to 3 percent interest. However, if you surrender your EIA early, you may have to pay a significant surrender charge and a 10 percent tax penalty that will reduce or eliminate any return.
How good is this guarantee?
Your guaranteed return is only as good as the insurance company that gives it. While it is not a common occurrence that a life insurance company is unable to meet its obligations, it happens. There are several private companies that rate an insurance company’s financial strength.
What is a market index?
A market index tracks the performance of a specific group of stocks representing a particular segment of the market, or in some cases an entire market. For example, the S&P 500 Composite Stock Price Index is an index of 500 stocks intended to be representative of a broad segment of the market. There are indexes for almost every conceivable sector of the stock market. Most EIAs are based on the S&P 500, but other indexes also are used. Some EIAs even allow investors to select one or more indexes.
How is an EIA’s index-linked interest rate computed?
The index-linked gain depends on the particular combination of indexing features that an EIA uses. The most common indexing features are listed below. To fully understand an EIA, make sure you not only understand each feature, but also how the features work together since these features can dramatically impact the return on your investment.
- Participation Rates. A participation rate determines how much of the gain in the index will be credited to the annuity. For example, the insurance company may set the participation rate at 80 percent, which means the annuity would only be credited with 80 percent of the gain experienced by the index.
- Spread/Margin/Asset Fee. Some EIAs use a spread, margin or asset fee in addition to, or instead of, a participation rate. This percentage will be subtracted from any gain in the index linked to the annuity. For example, if the index gained 10 percent and the spread/margin/asset fee is 3.5 percent, then the gain in the annuity would be only 6.5 percent.
- Interest Rate Caps. Some EIAs may put a cap or upper limit on your return. This cap rate is generally stated as a percentage. This is the maximum rate of interest the annuity will earn. For example, if the index linked to the annuity gained 10 percent and the cap rate was 8 percent, then the gain in the annuity would be 8 percent.
Caution! Some EIAs allow the insurance company to change participation rates, cap rates, or spread/asset/margin fees either annually or at the start of the next contract term. If an insurance company subsequently lowers the participation rate or cap rate or increases the spread/asset/margin fees, this could adversely affect your return. Read your contract carefully to see if it allows the insurance company to change these features.
Indexing Methods. As described in the table below, there are several methods for determining the change in the relevant index over the period of the annuity. These varying methods impact the calculation of the amount of interest to be credited to the contract based on a change in the index.
|Annual Reset (Rachet)||Compares the change in the index from the beginning to the end of each year. Any declines are ignored.Advantage: Your gain is “locked in” each year.Disadvantage: Can be combined with other features, such as lower cap rates and participation rates that will limit the amount of interest you might gain each year.|
|High Water Mark||Looks at the index value at various points during the contract, usually annual anniversaries. It then takes the highest of these values and compares it to the index level at the start of the term.Advantage: May credit you with more interest than other indexing methods and protect against declines in the index.Disadvantage: Because interest is not credited until the end of the term, you may not receive any index-link gain if you surrender your EIA early. It can also be combined with other features; such as lower cap rates and participation rates that will limit the amount of interest you might gain each year.|
|Point-to-Point||Compares the change in the index at two discrete points in time, such as the beginning and ending dates of the contract term.Advantage: May be combined with other features, such as higher cap and participation rates, that may credit you with more interest.Disadvantage: Relies on single point in time to calculate interest. Therefore, even if the index that your annuity is linked to is going up throughout the term of your investment, if it declines dramatically on the last day of the term, then part or all of the earlier gain can be lost. Because interest is not credited until the end of the term, you may not receive any index-link gain if you surrender your EIA early.|
- Index Averaging. Some EIAs average an index’s value either daily or monthly rather than use the actual value of the index on a specified date. Averaging may reduce the amount of index-linked interest you earn.
- Interest Calculation. The way that an insurance company calculates interest earned during the term of an EIA can make a big difference in the amount of money you will earn. Some EIAs pay simple interest during the term of the annuity. Because there is no compounding of interest, your return will be lower.
- Exclusion of Dividends. Most EIAs only count equity index gains from market price changes, excluding any gains from dividends. Since you’re not earning dividends, you won’t earn as much as if you invested directly in the market.
Can I get my money when I need it?
EIAs are long-term investments. Getting out early may mean taking a loss. Many EIAs have surrender charges. The surrender charge can be a percentage of the amount withdrawn or a reduction in the interest rate credited to the EIA.
Also, any withdrawals from tax-deferred annuities before you reach the age of 59½ are generally subject to a 10 percent tax penalty in addition to any gain being taxed as ordinary income.
Is it possible to lose money in an EIA?
Yes. Many insurance companies only guarantee that you’ll receive 90 percent of the premiums you paid, plus at least 3 percent interest. Therefore, if you don’t receive any index-linked interest, you could lose money on your investment. One way that you could not receive any index-linked interest is if the index linked to your annuity declines. The other way you may not receive any index-linked interest is if you surrender your EIA before maturity. Some insurance companies will not credit you with index-linked interest when you surrender your annuity early.
Do EIAs and other tax-deferred annuities provide the same advantages as 401(k)s and other before tax retirement plans?
No, 401(k) plans and other before-tax retirement savings plans not only allow you to defer taxes on income and investment gains, but your contributions reduce your current taxable income. That’s why most investors should consider an EIA and other annuity products only after they make the maximum contribution to their 401(k) and other before-tax retirement plans.
This very valuable investing information was obtained from FINRA’s website.
Call a Securities Arbitration Lawyer for a free consultation on how to recover your losses. To speak with an attorney, call 888-760-6552, or visit www.stockmarketlawsuit.com. Soreide Law Group, PLLC., representing investors nationwide before FINRA the Financial Industry Regulatory Authority.
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Insurance Fraud Alert-
Stranger Originated Life Insurance or STOLI.
Brokers and financial advisors promising big profits on resale of universal life policies.
Many stockbrokers and financial advisors are having their clients purchase large universal life insurance policies with the promise of a big profit on resale after the two year contestability period passes. There is a promise that the profit from the sale would not only cover the premiums but would put a profit in the insured’s pocket with enough money to purchase another policy and do it all over again. Unfortunately, these brokers are over promising and grossly over representing the legality and liquidity of the resale of the insurance policy especially when it was purchased for the sole purpose of reselling.
Another common insurance scam facilitated by ignorant or greedy stockbrokers or financial advisors is the Stranger Originated Life Insurance or (“STOLI”) life insurance transaction. STOLI’S are heavily regulated transactions where a lot of illegality can take place if not executed correctly. Many states have made laws or are making laws prohibiting STOLI transactions. STOLI policies are life insurance policies where an insurance investor has their client (usually an elderly person) put their name as the beneficiary on the life insurance policy even though the insurance investor has no insurable interest in their client. This means that the insurance investor is not a relative and is only making the STOLI transaction in order to make money off of the insured person after they die.
STOLI transactions are marketed towards the elderly, especially the elderly who may not live much longer. These insurance investments are generally held for the two year contestability period then resold on the market. Many stockbrokers and financial advisors have been getting involved in the sale of life insurance due to the excessive commissions generated off of universal life insurance policies. Investors who probably don’t need life insurance are being pressured into purchasing these policies and listing the insurance investors as the beneficiaries. The elderly may be “wined and dined” by the insurance investor and told that they can get a cash bonus by making the STOLI transaction. Unfortunately, seniors are often times unaware that they have to pay taxes on the cash bonus and could be charged with theft by agreeing to the transaction. Also, STOLI transactions may make it harder for seniors from getting other life insurance in the future.
In addition, STOLI policies can be bought and sold to more than one person so many insurance investors are, in a sense, wagering on someone’s death.
If you purchased a STOLI or a viatical investment or your broker convinced you to purchase a universal life insurance policy for the purpose of reselling it you may be able to bring a legal claim for recovery of your money. For more information call Soreide Law Group at 1- (888) 760-6552 or visit www.stockmarketlawsuit.com.
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