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A federal judge allowed the civil-lawsuit claims of an Indiana family to go forward against American International Group Inc., (AIG) in which the family alleges the insurer was complicit in a "scheme" to let investors buy life insurance on older people as speculative bets. The claims got the go-ahead last week as the judge ruled on multiple motions in the dispute in U.S. District Court in Indianapolis over a $15 million policy on Germaine "Suzy" Tomlinson, who drowned, fully clothed, in her bathtub in 2008.

These policies are stranger-originated life insurance (STOLI) policies. Unsuspecting seniors nationwide could be lured into committing fraud and losing their ability to ever get life insurance again. STOLI transactions are arrangements in which investors pay the elderly — especially those with limited life expectancies — to buy life insurance policies and then resell them to the investors. The investors often pay the policyholder’s insurance premium, typically for two years, at which point the policy is "sold" to the investors, who collect the proceeds of the policy when the policyholder dies. The policies are bundled together as "death bonds" by Wall Street in packages similar to the notorious mortgage-backed securities.

According to The New York Times, finding enough life insurance policies to satisfy investor hunger has proved difficult. So, in addition to the free cruises in Florida, investors including one large hedge fund have hired a California telemarketing company to call elderly citizens and ask if they would apply for life insurance in exchange for a paycheck.

But the insurance industry, which factors in a percentage a dropped policies, has begun to fight back. Legislatures in New Jersey, New York and nine other states have proposed or passed laws intended to outlaw spin-life investments or make it more difficult for investors to get payouts, according to the Life Insurance Settlement Association.

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