When to use lol? I'd say pretty much never. Unless you mean it literally. Otherwise it sounds foolish. It's original purpose, to reward people who couldn't hear you laugh (a terrible surrogate anyway), has long since passed into folklore.
Maybe I'm wrong. I mean, maybe it's not used enough. Maybe everyone should use lol. All the time. JUST IN CASE people don't know you're kidding. Or so people will think you are kidding, when you're not.
Check this out:
"This is a sentence. lol."
"This is a funny sentence. lmao."
Softening the blow:
"Honey, I have syphilis. lol."
I know I shouldn't have, but I couldn't help myself:
"I just drowned a puppy. lol."
"Let's totally have sex then. lol."
Bridging the gap:
"Yeah, I know you're a republican. All republicans are a-holes. lol."
(please insert the appropriate political party and notice it works both ways)
Hiccups (aka, drunk):
"Yeah.lol. I know. lol. that's totally true. lol. I am totally an lol-er. lol."
Right now, I am saying something that I know is true, that I want you to know is true but I don't want you to have any evidence against me:
"You are an irritating person. lol. I have always hated you. lol. If I could, I would take all your money and never see you again. lol."
I hope you die. lol.
Lol has sure come a long way.
Here is a cute little story about the time I learned what lol stands for (this should also be helpful for those that have no idea what it means, however, this is no excuse to take up using it).
So I am in a chat room maybe ten years ago (I know, it's where ugly people go to make friends without good looking people throwing rocks at them and yelling "go back inside, freak."), and I say something incredibly witty (like I always do. lol), and someone types back "lol" and someone else types "lol" and maybe even a third person. I was like, what the heck, I was so witty that I gave all these people some sort of fit where they are unable to type correctly anymore. Then they all start up with the chatting again. So I got a little curious and I typed "what is this lol?" and someone typed "laugh out loud" and I thought, oh it's funny because I don't get your little lingo, eh. So I go on "chatting". And inevitably, I say something else clever and witty. And again with the lols. I am still confused. I ask again, "what's with this lol? I don't get it." Two responses from two different chatters "laugh out loud" and "Laugh Out Loud". I still don't get it and I had an ever so brief moment where my self esteem was low (lol) and I type back: "when you get done laughing at me, can you tell me what lol means?"
Finally somebody has the ability to see just how thick headed I am. "Dude (which is hilarious considering my chat name was sexylady99), LOL means Laugh Out Loud."
I type: "oh. I get it." I laughed out loud. A little, so I typed it. "lol" and then everyone else thought that was really funny, so there were a whole slew of "lol's typed that day.
I am pretty sure that is when the firmament burst and the flood gates opened and people have been drowning in it ever since. It's my fault.
If you still want to keep using lol, don't worry. I'll still totally love you. lol.
(pic stolen from Jonathan - thanks!)