June 13, 2014 Articles

Investor/Stranger–Owned Life Insurance: The Good, the Bad, and the Ugly

An examination of the most common types of this insurance, its uses and abuses, current litigation, and legislative reactions regulating or banning it

by Charles C. Morgan [1]

Almost from its inception, the sale of life insurance has been subject to regulatory restrictions intended, among other things, to prevent wagering on the lives of the insureds. Thus, various states have enacted insurable interest statutes limiting purchases of insurance to individuals with a close familial relationship to the insured.

Legislatures have expanded those insurable interest statutory provisions over time to permit sales of life insurance to purchasers who have a financial or other legitimate interest in keeping the insured person alive, including situations where there is an economic relationship (e.g., where an employer incurs a financial detriment triggered by the death of the insured).

Legitimate uses of life insurance for purely economic purposes can be obscure to the uninformed spectator[2] and easily confused with its acquisition by third parties who do not have any relationship with the insured except by virtue of owning the insurance policy.

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