As any life insurance claim attorney knows, the purpose of life insurance is to provide for one’s dependents after one’s death. However, life insurance policies have also become an investment vehicle for professional investors seeking new avenues of investment and wealth production.
Most people think of life insurance as a contract between an individual and an insurance company for the benefit of the individual’s named beneficiaries. The beneficiaries are almost always related to the insured individual or at least have some tangible relationship with the insured.
Can Life Insurance be Transferred as a Form of Property?
Over the last 100 years, perspectives on life insurance have changed. Insurance policies are considered a form of transferable property. A secondary market for life insurance has arisen.
The owner of a life insurance policy may transfer ownership of the policy and/or the benefits to a third party. The reasons this may occur are as varied as the policyholders. Some holders may be diagnosed with terminal illnesses and need cash for medical treatment, living expenses and burial costs. Others may decide they no longer need or want the policies they have and want more options than surrendering the policies or letting them lapse.
What is an Insurable Interest?
Many legitimate reasons exist for transferring insurance policies. However, the transference of these policies may become questionable when the policy is obtained for the benefit of a third party who has no insurable interest in the person taking out the policy.
An “insurable interest” is a legally-recognized interest like that which occurs when one derives a benefit or advantage from the insured person being alive. For example, a person related by blood, marriage or mutual affection has an insurable interest in a policyholder. In many states, a business partner or someone with a strong financial relationship with the insured may be considered to have an insurable interest.
What is a Stranger-Originated Life Insurance Policy?
A stranger-originated life insurance policy is an arrangement in which a life insurance policy is obtained solely to benefit a third party who has no insurable interest in the policyholder. In such transactions, a policyholder obtains a life insurance policy with the investor named as the beneficiary. The policyholder receives a lump-sum payment. The investor pays the insurance policy premiums, as well as any fees associated with the application process. A broker is usually involved and the investor pays the broker fees as well.
At the end of the transaction, the original policyholder has cash, and the investor is the future recipient of any life insurance proceeds to be paid upon the policyholder’s death. The investor may be the owner of the policy.
Do You Need a Lawyer?
Stranger-originated life insurance policies are illegal in many states. In many other states they are highly regulated. Insurance companies may refuse to pay claims on stranger-originated life insurance policies. In the last ten years, many lawsuits have been filed to invalidate stranger-originated life insurance policies.
Stranger-originated life insurance policies are generally considered to go against the purpose of life insurance, which is to provide for a decedent’s dependents, not third party investors. In addition, the policyholders who become the subject of these transactions are often between the ages of 65 and 85 and may be particularly susceptible to scams or unethical practices.
Anyone considering obtaining life insurance for the purpose of transferring it to a third party, and anyone considering transferring or selling an existing life insurance policy should consult with an experienced life insurance claim lawyer. An attorney will know if the proposed transaction is legal, and if so, what the policyholder should consider before entering into such an agreement.
Attorney Chad G. Boonswang has helped many families understand their life insurance options and settle their life insurance claims. Contact him today for a free consultation about your insurance needs.