STRANGER-OWNED LIFE INSURANCE

It will be a long time before this subject goes away. Back again – this time in the form of a New Jersey Supreme Court case, filled with hypocrisy and fraud – lots of bad stuff. A woman buys a life insurance policy in 2007, premiums are paid by unrelated investors and the policy is sold to a life settlement company in 2009 (when the contestable period expires). It gets worse. When the insured died in 2014, the carrier concluded that the policy had been obtained through fraud and declined to pay the death benefit (I’m betting they welcomed the business at inception and knew exactly what it was). The carrier claimed that, under New Jersey law, buying a life insurance policy for the sole purpose of selling it to a party having no insurable interest in the life of the insured is illegal wagering, that such a policy is void from the beginning, they should get to keep all the premiums paid and not have to pay the death benefit! The buyer/owner/beneficiary argued that a life insurance policy is a contract, not a wager, and that the death benefit should be paid. The stakes here are higher than they might appear. To require payment of the death benefit is to allow what was clearly a wagering transaction. If the court supports the carrier’s wagering position, are honorable life settlements illegal wagers? This is another example of how an abusive transaction has ripple effects into the proper uses of life insurance and life settlements.