The leaders of a House Ways and Means subcommittee want the Treasury Department to warn seniors about the possible tax consequences of getting involved in stranger-originated life insurance arrangements.

In a letter to Treasury Secretary Henry Paulson, Rep. Richard Neal, D-Mass., chairman of the Select Revenue Measures Subcommittee, and Rep. Phil English, R-Pa., the most senior Republican on the subcommittee, write that STOLI marketers often use cruises or expensive dinner vouchers to persuade elderly individuals to accept “free” life insurance.

The STOLI policies themselves are under the jurisdiction of the states, not the Treasury Department, but the federal rules governing split-dollar arrangements and cancellation of indebtedness also may come into play, Neal and English write.

“In certain cases, the terms for the initial arrangement may not qualify as true indebtedness, thus exposing the insured to income inclusion,” Neal and English write. “Also, depending upon the value of the promotional incentive or cash payment, the insured could be taxed on the value of the promotion received. Depending upon the structure of the product promoters may also be liable for information reporting.”

Neal and English note that they do not want to interfere with policyholders’ ability to sell policies.

“Rather, we seek Treasury’s assistance in notifying elderly taxpayers of the adverse consequences of investing in a product that is in fact ‘too good to be true,’ ” the lawmakers write. “ While we recognize that STOLI products can take various forms that potentially alter the tax treatment, we believe that guidance could be crafted to address these variations.”

“The congressmen put it well, noting the potentially adverse tax consequences associated with these arrangements, particularly for seniors,” says Jack Dolan, a spokesman for the American Council of Life Insurers, Washington.

“Word is getting out about the problems consumers participating in STOLI arrangements can face,” Dolan says.

The Life insurance Settlement Association, Orlando, Fla., welcomes the idea of Treasury officials issuing guidance on the subject, according to LISA Executive Director Doug Head.

“The more clarification they can offer, the better,” Head says.