Life Settlements, STOLI Pose Potential Insurable Interest Problems
Virtually every jurisdiction in the United States recognizes a person’s right to insure his or her own life and name another as the policy beneficiary, either through an assignment or express designation. The designated beneficiary or assignee is thereafter deemed to have an insurable interest in the insured person’s life by virtue of that designation or assignment.
In the context of life or viatical settlements, the requirement of an insurable interest is typically satisfied when the insured person assigns the policy to the purchaser. The insured person in a “stranger owned life insurance” or “STOLI” transaction may likewise satisfy the insurable interest requirement through designation or assignment. Thus, it is arguable that the beneficiary in both life settlement and STOLI transactions have an insurable interest in the insured person’s life because of the assignment—an act taken by the insured person himself.
One matter absent from the current debate over life settlement and STOLI transactions, however, involves the maintenance of an insurable interest after a secondary transfer of the policy. Most contracts may be transferred time and time again. But life insurance policies are not like most contracts because the requirement of an insurable interest is a fundamental. It is therefore likely that the second (or third, or fourth) assignee of the life insurance contract will not have an insurable interest in the insured person’s life—the insured person did not assign the policy to the subsequent owner or name it as the policy beneficiary. And in many jurisdictions, the absence of an insurable interest renders the policy void as a wagering contract that violates public policy.
To learn more about this topic, please contact any of the firm's partners at mmellp.com.