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The offer is so deceptively appealing, even a smart guy like broadcaster Larry King got caught up in it.

The pitch goes like this: an unscrupulous insurance brokerage or investor group approaches a wealthy senior and persuades him or her to purchase a multimillion-dollar life insurance policy. The person then receives an immediate payment, perhaps $500,000, just for agreeing to allow the investor to pay the premiums and then collect the death benefit when he or she dies.

What those seniors, among them the host of “Larry King Live,” weren’t told, say regulators, is that the scheme, known as stranger-originated life insurance, or STOLI, could leave them without the ability to purchase any additional life insurance coverage and leave their heirs without money to pay off their debts when they die. They also aren’t typically told about the commissions and federal income taxes they’ll owe on the lump-sum payment received.

Iowa Insurance Commissioner Susan Voss calls the practice, in which speculators who otherwise have no insurable interest in someone can profit from their death, “downright creepy.” Last week, legislators were still wrangling over a bill that would outlaw the practice in Iowa. Voss said no instances of STOLI transactions have been reported in the state, and that the Iowa Insurance Division wants to head off STOLI before it becomes a problem here.

The practice highlights a dark underside of the booming life settlements industry, which representatives say provides a valid secondary market for life insurance policies. According to one estimate, between $15 billion and $20 billion of life insurance death benefits were sold in the United States via life settlement arrangements in 2007.

The issue has drawn the attention of organizations such as the National Conference of Insurance Legislators (NCOIL) and American Council of Life Insurers (ACLI), which are seeking legislation in all 50 states to ban the practice.

“Speculating on the death of someone is not good public policy,” said Frank Keating, the ACLI’s president and chief executive, who traveled to Des Moines earlier this month to lobby in support of the legislation. “You should be able to buy life insurance for its intended purpose: to help a spouse survive your death or to encourage estate protection,” the former Oklahoma governor said. Keating noted that Larry King last year became a high-profile example of a senior caught up in a STOLI scheme. King filed suit last fall in an effort to extricate himself from several STOLI transactions he entered into in 2004.

Insurance officials are also concerned that widespread STOLI transactions could disrupt the insurance market and cause premium rates to rise. Currently, the majority of life policies lapse without a payout of death benefits, but that could change if STOLI becomes prevalent.

In Iowa, the House Commerce Committee passed an amended version of the Senate bill on Feb. 27; it now goes to the House floor for debate. That measure, Senate File 2392, includes provisions to outlaw STOLI.

A number of other states, among them West Virginia, Indiana and North Dakota, passed measures based on the same model legislation this month, Keating said, and others, among them his home state of Oklahoma, are considering them.

An executive with Coventry First, the largest U.S. life settlement company, says legislation that has passed in some states has been unnecessarily broad and could hurt consumers who want to legitimately sell a life policy they no longer need. The company announced three years ago that it would not purchase policies created through such STOLI practices.

“It puts up barriers to consumers to find a market for their life insurance,” said Michael Freedman, senior vice president with Coventry First, which is based in Fort Washington, Pa.

He said model legislation put forth by the National Association of Insurance Commissioners (NAIC), which limits the ability of life insurance policies to be sold for five years following their issue date, “directly attacks all consumers to get at some bad actors.” Freedman said model language from the NCOIL more directly addresses STOLI transactions.

Tom Alger, a spokesman for the Iowa Insurance Division, said last week that the bill as passed by the Senate includes features from both the NAIC and NCOIL models.

“It’s a stronger bill than the one we actually introduced,” Alger said. “It got down to our core goal of defining and stopping stranger-originated life insurance. … We’re hopeful that some version of this bill will pass.”

Keating noted that no form of the legislation would preclude policyholders from selling a policy, whether by cashing it in with the insurer or selling it in the life settlements market.

“The difference is, I’ve been paying the premiums; I want me to live, and I think my wife, who is the beneficiary, wants me to live,” he said. “But if we decide we want the money, we can (sell it), just like any other piece of personal property.”