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New York Department Bars Investor-Owned Life Scheme

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New York state regulators have reaffirmed their long-held position that investor-owned life insurance policies are invalid in the state.

In a decision issued in December and recently published on the New York Insurance Department website, the department’s Office of General Counsel barred a type of investment vehicle in which money is lent to an individual to buy life insurance on his or her own life for a limited period and then sell the policy to an investment group.

The decision was requested on behalf of an unidentified client by a law firm, Skadden, Arps, Slate, Meagher & Flom LLP, New York. According to legal papers submitted to the state insurance department, the client wanted to be able to provide a “put option” agreement to the insured whereby the provider, a European hedge fund, would buy the policy on the exercise date at a set price.

However, under terms of the proposed transaction, if the insured died during the policy period, which was for two years, the loan plus interest would be repaid out of the policy proceeds. The remainder would go to named beneficiaries or to the client’s estate.

The attorney requesting the opinion from the department’s OGC maintained that the insurable interest law would not be violated because at the time the policy was bought, the purchaser had an insurable interest in his or her own life.

“The fact that the purchase is done with borrowed money or that a guarantee and put arrangement has been put in place should not influence the analysis of whether a valid insurable interest has been created,” according to the attorney, Bertil Lundqvist, who has since left the Skadden firm.

The OGC did not buy that argument. It objected to a provision of the transaction in which the hedge fund would be able to buy the policy after a specified exercise period. The fund would then be able to profit from the payout when the insured ultimately died.

The insurance department said such arrangements are intended to create policies strictly for resale, contrary to law.

New York law requires policies to be obtained by clients on their own initiative, the decision noted, and any person or entity benefiting from a policy payout must have a legitimate “insurable interest” in the life of the client.

The insurance department ruled the transaction in question violated a state law barring purchase of a life insurance policy “solely as a speculative investment for the ultimate benefit of a disinterested third party.”

Also questionable was that since the insured ultimately would pay off the policy loan when he sold the policy, the individual essentially receives free life insurance coverage for the term of the transaction, the department noted.

The transaction “is contrary to the long-established public policy against ‘gaming’ through life insurance purchases,” the decision added.

The American Council of Life Insurers, Washington, issued a statement supporting the state’s opinion.

“This type of premium financing transaction circumvents the letter and spirit of the insurable interest law,” said ACLI spokesman Jack Dolan.

The top executive of a life settlement company also lauded the opinion, calling investor-owned life insurance a threat to the industry.

“Our company has been in the insurance settlement business since 1989 and has seen a lot of schemes come and go,” says William Scott Page, president and CEO of The Lifeline Program, Atlanta, Ga. “We need to take a stand against this practice of concocting manufactured life insurance policies with no insurable interest.”

The state’s decision can be found on the Web at .


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