Investor Initiated Life Insurance

Investor initiated life insurance (also called stranger-owned life insurance or speculator initiated life insurance) is an arrangement where “investors lend wealthy individuals money to pay life insurance premiums for a designated period. * * * After the period expires, the individual has three options: repay the loan with interest and keep the policy, sell the policy and repay the loan with interest or transfer the policy to the investor, usually a hedge fund. If the policy is transferred, the investor receives the death benefits when the insured individual dies.”  Gary S. Mogel, Investor-initiated life may be in jeopardy, Investment News, Feb. 27, 2006.

Several states are taking action to restrict the use of this technique.

• New York — In December 2006, “the New York State Insurance Department banned the insurance arrangements as a “speculative investment for the ultimate benefit of a disinterested third party” lacking an insurable interest.”  Id.
• Louisiana — “Such arrangements may, depending on the facts, violate some or all of the following Louisiana Insurance Code provisions, or other Louisiana statutes or jurisprudence, including, but not limited to: insurable interest; prohibition on wager policies; rebating; prohibition on “wet ink” life settlements; premium finance; and usury.”  Bulletin No. 06-05.
• Utah — The department’s position regarding these life insurance transactions is that they are not compliant with the insurable interest requirement of this state.”  Bulletin No. 2006-3.