One of the issues surrounding stranger-oriented life insurance, is that investors providing life settlements in exchange for being named beneficiaries have no insurable interest in the insured individuals. Insurable interest statutes in most states require an insurable interest (the beneficiary must be related to or financially reliant on the insured in some way) to be in existence when a policy is purchased (hence the naming of a relative as beneficiary for the first couple of years of a policy’s existence).
Therefore, according to Jack Dolan at ACLI, when an uninsured person is approached on behalf of investors, “these arrangements are designed to circumvent state insurable interest statutes.” The insured person also may be laying himself open to charges of fraud from the insurance company that issued the policy.
The concept of insurable interest dates back to the Insurance Act of 1774, also known as the Gambling Act of 1774, passed by Parliament in Great Britain to prevent people from essentially gambling on the lifespans of strangers by insuring their lives.
Dolan further cautions that there’s a loss of privacy that comes with life settlements, pointing out that insureds “may not know they will be visited fairly frequently through one form or another for health checkups.” One also has to wonder how comfortable it would be to an insured to know that these visits are more to see how quickly his health may be deteriorating, rather than to be sure that he is faring well.