CNN talk show host Larry King — he of the ubiquitous and colorful suspenders — is, by all accounts, pretty savvy. However, for all his experience in ferreting out ne'er-do-wells, he apparently is as susceptible to financial schemers as the next guy. In October 2007, King filed suit against an insurance services company and the people who steered him into a Stranger Originated Life Insurance (STOLI) deal. In the suit, King claimed that not only was he not informed of the full financial and tax implications of the life settlements, but that the venture caused him to "use up" his insurability, making it difficult to secure life insurance in the future.

King is simply a celebrated example of a burgeoning problem that the National Association of Insurance and Financial Advisors (NAIFA) has been warning about for years and working to address legislatively at both state and national levels. NAIFA was a key backer of a recent bill signed into law by California Gov. Arnold Schwarzenegger (SB 98) to regulate life settlement transactions and ban STOLI deals in that state.

In a STOLI scheme, investors induce seniors to purchase expensive life insurance, loan them money to pay the premiums and, after the two-year contestability period, assume ownership of the policy. The sooner the person dies, the more profitable the death benefit the investor collects. Consumers lured into such deals, such as King, are usually unaware of the tax consequences, commissions, and legal fees involved. They also seldom understand that the deal compromises or completely exhausts their insurance capacity (insurance capacity is the maximum amount of insurance that you are allowed to purchase on your life).