Ameritas Suit Could Shake Up Life Settlement Market

Ameritas Life has filed a lawsuit that could change how life settlement investors see convertible term life insurance policies.

The life insurer contends that a life settlement investor buying an in-force term life policy may not be able to exchange the term life policy for a permanent life policy, because the new investor owner has no insurable interest in the life of the insured.

If the new investor owner of a term life policy exercises the policy’s conversion option, the investor owner may be creating “stranger-originated life insurance” and violating state anti-STOLI laws, according to Ameritas.

Ameritas makes that argument in a suit, Ameritas Life Insurance Company v. Wilmington Trust, that was filed March 25 in the U.S. District Court for the District of California.

Wilmington Trust declined to comment.

What it means: If the court decides that an investor owner cannot exercise a term life policy’s conversion provision, that could hurt clients’ ability to sell convertible term life policies to investors.

Life settlement investors usually prefer owning permanent life policies, because they get paid when the insured dies. Keeping a permanent life policy in force until the insured dies is often cheaper and easier than keeping a term life policy in force until the insured dies.

The policy: Amir Moghadam, a 47-year-old California resident, bought a renewable term life policy with a $3.7 million death benefit from a company now owned by Ameritas in 2004. The policy had a 20-year level-premium term.

The policy gives Moghadam the privilege to convert to a type of permanent life policy — a flexible-premium, adjustable universal life policy — up until Feb. 15, 2033.