For someone to buy a life insurance policy on the life of another person, that purchaser must have an “insurable interest” in the insured. That insurable interest is a reason that the purchaser wants the insured to live. This requirement makes sure that the buyer is not betting (or hoping?) that the insured dies anytime soon. In today’s marketplace, there is a strong business in buying the policies of those that may not have long to live. It even has a name with a catchy acronym: Stranger Owned Life Insurance or STOLI. This is permitted so long as the buyer can show an insurable interest. In these cases, the buyer of the policy pays the premiums and keeps the proceeds upon the insured’s death. But can one buy a policy on his or her own life, satisfying the insurable interest requirement, but sell it to a stranger the day after its issued? Is that buyer just betting that the insured does not live long?
In a Court of Appeals case, an insured bought more than $50 million in insurance policies on his own life, placed the policies into trusts and promptly sold them or, more accurately, assigned the right to collect on them when he passed away to a third-party. After his passing, litigation ensued, and the question of assigning one’s policy to one with no insurable interest was raised. Initially, the courts had no answers. After a process through Federal Court, the New York State Court of Appeals found the assignment valid. Although this transaction allows for an end-run of the insurable interest requirement, the court’s strict reading of the applicable law left it no room for a different outcome. Interestingly, there was a strong dissent, who saw this arrangement for what it was, a wager on the life of the insured. This has been rendered largely moot, as laws have been enacted to prohibit this type of arrangement, but illustrates the creativity of some to beat the system.