Sure, they could simply stop paying future premiums and drop the policy. But most had signed loan documents, personally guaranteeing repayment of at least 25 percent of the loan, plus interest. That was something they never thought about when they took out the life policy in the first place.

Wealth advisers Marc Sheridan and Don Tolep of Miami-based Sheridan Wealth Advisors (sheridanwealthadvisors.com) say they're seeing more seniors whose retirement will be devastated by the need to repay these loans. And they point out that the 25 percent guarantee is only the start of the financial consequences.

Forgiven loans are taxed

Take a close look at the example of a $5 million policy with a $200,000 annual premium. The policyholder had guaranteed 25 percent of the first two years' payments, or $400,000, plus interest at 6 percent, perhaps amounting to $24,000.

At the end of two years, the senior owes $100,000 plus interest on that money, adding another $6,000 to the tab. But that isn't all that will be owed. If the senior manages to pay off the guaranteed amount, plus interest, the lender will "forgive" the $300,000 balance, and the additional interest.

But wait. The Internal Revenue Service considers "forgiveness of debt" to be income, so the lender will send you a Form 1099C, informing you that you owe taxes on the debt that was forgiven. If $300,000 plus $18,000 in interest were forgiven, then someone in a 35 percent tax bracket would owe an additional $100,000 in taxes on this "phantom" income! At this point, you need to consult your tax adviser for consequences in your own situation.

To simply walk away from this deal, the policy buyer would owe more than $200,000 -- half in guarantees to the lender, half in taxes to the IRS. Or he or she could keep paying the premiums of $200,000 a year, hoping to find a buyer who would pay something for the policy. What a choice!

Sheridan and Tolep say the IRS may be collecting as much as $1 billion in taxes on this phantom income. Meanwhile, the brokers that originally sold the policies collected fat commissions from the insurance industry. Now they're nowhere to be found. Since the policy buyer probably lied to the insurance company on the application, saying he or she had no intention of selling the policy, it will be tough to sue the insurance company!

It's estimated that more than 10,000 of these "spin life" policies were sold in recent years. For a while it looked like easy money for those willing to "share" their insurable capacity. Now they're learning an expensive lesson -- the real cost of anything "too good to be true."