It's been a while since we've discussed "Stranger Owned Life Insurance." This is where one sells one's life insurance policy to someone who will pay cash now in exchange for the death benefit later. It's a close relative of "viaticals," which are typically used by folks who are terminally ill in order to receive an immediate infusion of cash.
In the case of SOLI, no such morbid motivation exists; rather, it's a straight business proposition, not unlike selling a piece of real estate. The challenges lie in a couple of key areas:
First, when one buys a life insurance policy, one names a beneficiary. At least initially, that person (or entity) has to have an "insurable interest" in the life of the insured. For example, a wife would have an insurable interest in her husband's life; if he dies, his income needs to be replaced, perhaps the mortgage paid off, that kind of thing. A business which purchases a key-person policy on a valued executive has an insurable interest in his life; if he dies, it may take years and lots of cash to rebuild the business.
Further out, charitable organizations may have an insurable interest: folks often buy insurance policies naming their church as the beneficiary, and this is well established and "kosher" (if I may mix a metaphor).
Years ago, I even saw a policy which an ex-wife could buy on her former spouse without his knowledge, to replace alimony and child support.
But SOLI is a different animal: there is no insurable interest because there is no relatinship. The parties are, by definition, strangers to one another. Which begs the question: at what point does insurable interest cease to be relevant? We know that it must be there when the policy is first purchased, but what about after it's in force?
Which brings us to the second insurance principle at play here: moral hazard. P&C companies have strict rules about how much homes can be insured for, and what condition they must be in. They don't want to tempt insured's into a literal "fire sale." And so life insurers are loathe to make their insured's "easy targets." Both of these eventualities would be "against the public interest." Thus, when purchasing a policy, the initial beneficiary must demonstrate an insurable interest.
Which brings us back to the question I posed above: "what about after it's in force?"
Well, the Ohio Department of Insurance has decided to weigh in:
"A bill that would tighten state law governing the method of buying life insurance policies from consumers has passed in the Ohio House and is on its way to the state Senate floor...(the law) takes steps to improve protections for those looking to sell a policy to a third party and creates a legal framework for prevented what's called "stranger-oriented" life insurance."
The idea is to impose a "waiting period" between the time the agreement is reached and when it can take effect. On the one hand, it makes sense to encourage unwitting consumers to carefully consider what they're doing. On the other, though, if life insurance ownership is truly comparable to ownership of any other property (which I maintain it is), then why is it the government's business to whom I choose to sell?
A clue may be found here:
"The bill's supporters...(claim that) worries are mounting that a growing share of viatical settlements are arranged purely for financial gain."
Selling property for profit is now considered "worrisome?" Is this because, unlike the sale of most property, no taxes are paid in this transaction? Or are they worried that this will lead to a lot of "suspicious" deaths?
If the former, I'm disappointed, but not surprised. If the latter, well, maybe there's something to it.
(H/T: Bob Vineyard)