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Understanding the Insurable Interest Requirement for Life Insurance Policies, Part 2

In our last post, we discussed the insurable interest requirement in Tennessee. Under that requirement, the prospective owner of the policy must prove that he or she would suffer some type of loss if the insured were to die while the policy was in effect. This requirement prevents speculators from buying insurance on a person’s life in the hopes that the person dies before the death benefit exceeds the amount of premiums paid.

Obtaining and assigning financial instruments can be a lucrative business. So, sometimes, parties may try to structure a life insurance policy in such a way that it appears that the policy were supported by an insurable interest.  Courts, however, may well scrutinize such policies, especially if it appears that a speculator used an elderly person as a conduit to acquire a beneficial interest in a life insurance policy that the speculator otherwise could not acquire.

For example, in Sun Life Assurance Co. of Canada v. Conestoga Tr. Servs., LLC (E.D. Tenn. July 12, 2017), a business called Life Asset sought to acquire a beneficial interest in a life insurance policy on an elderly person named Erwin Collins.  Life Asset had no ties to Collins and had no insurable interest on his life.  In order to maneuver around the insurable interest requirement, Life Asset worked with an intermediary to set up a trust naming Collins as the grantor and Collins’ wife as the grantee. The trust then applied for the policy, and the policy was later issued to the trust as a policy owner.

Before the policy was issued, the elderly Collin’s wife agreed to sell her beneficial interest in the policy to Life Asset. This policy was later assigned six different times.  After Collins died, the life insurance company filed an action in federal court seeking a declaration that the final assignee of the policy had no right to recover the proceeds because the policy was void.

In ruling in favor of the insurance company, the court held that the trust never had an insurable interest in Collins’ life, and, therefore, the policy was void when it was issued.  As the Conestoga court explained, Life Asset participated in what it called a “STOLI” policy, a “speculative investment device that entails gambling on the lives of the elderly.”  These types of policies are void pursuant to two separate laws: Under Tenn. Code Ann. § 29-19-101, contracts founded, in whole or in part, on a gambling consideration are void. Second, under Tenn. Code Ann. § 56-7-101, a person who buys a life insurance policy must have an insurable interest in the life being insured.

The assignee that was trying to recover the life insurance proceeds argued that the policy was supported by an insurable interest because it was issued to a trust of which Mr. Collins’ wife was a beneficiary.  Under Tennessee law, if a life insurance policy is supported by an insurable interest at the time it is issued, that policy can later be validly assigned to a person or entity, regardless of whether or not the insurable interest still exists.  However, the Conestoga court found the trust did not have an insurable interest at the time the policy was issued because the trust that took out the policy was a sham.

In explaining its decision, the court noted that the trust did not pay any premiums on the policy.  In fact, the trust never had any money. It was simply a vehicle for Life Asset to purchase the policy and sell it to another speculator for more than the premiums paid to the point of sale.

If you have a life insurance policy case involving a dispute over an insurable interest, consult with an experienced life insurance lawyer before taking the word of the insurance company that you are not entitled to be paid.