On January 22, 2008, the Honorable Denny Chin of the U.S. District Court for the Southern District of New York issued a decision in the case of Life Product Clearing LLC v. Linda Angel et al., holding that life insurance policies are invalid if purchased solely for resale to a third party.
The Life Product Clearing (â€œLPCâ€) decision is important because it analyzes the law governing Stranger-Owned Life Insurance (â€œSOLIâ€), also known as â€œwagerâ€ insurance policies, which are life insurance policies that enable the insured to obtain immediate cash by selling the policy to a stranger who has an interest in the early death of the insured.
In the LPC case, the insured-decedent Leon Lobel (â€œLobelâ€), a 77-year-old retiree, purchased a $10 million life insurance policy (the â€œPolicyâ€). On the same day, Lobel established the Leon Lobel Insurance Trust (the â€œTrustâ€). Lobel named the Trust as the beneficiary on the Policy. Six days later, Lobel sold his interest in the Trust â€“ and thus the right to any insurance proceeds upon his death â€“ to LPC for $300,000. LPC brought a declaratory judgment action against Lobelâ€™s estate, claiming that Lobelâ€™s transfer of interest in the Trust to LPC was valid. LPC moved for judgment on the pleadings and the court denied its motion.
The issue before the court was whether the facts of the case provided a basis for the Estateâ€™s claims that LPC was a stranger to Lobel and that the transaction was essentially a wager on his death. The court relied on the â€œinsurable interest rule,â€ codified in New York Insurance Law Â§ 3205(b)(2), to support its finding that life insurance policies purchased solely with the intent to resell are impermissible. The insurable interest rule prohibits the purchase of life insurance for the benefit of a person who does not have an interest in the continuation of the life of the insured. The court held that â€œonly one who obtains a life insurance policy on himself â€˜on his own initiative,â€™ in good faith, and with a genuine intent to obtain insurance protection for a family member, loved one, or business partner, rather than an intent to disguise what would otherwise be a gambling transaction by a stranger on his life may freely assign the policy to one who does not have an insurable interest in him.â€ The court further held that, based on the set of facts pled, it is plausible that Lobel purchased the policy with the intent to resell it to a third party, rendering the transaction a sham to disguise an impermissible wager. Noting precedents, the court stated that the law â€œhas long shown a disdainâ€ for such â€œwagerâ€ transactions.
The intent of the insured at the time of the purchase of the policy is a fact-based inquiry to be determined on a case-by-case basis. When determining whether the purchase of life insurance was a sham to evade the insurable interest rule or a genuine good faith assignment, the court considered, among other factors, (a) whether the insured could afford the premiums without the assistance of a third party, (b) whether the insured in fact paid the premiums, and (c) the length of time the insured held the policy before assigning it.
In sum, according to the court, immediate surrender of a life insurance policy is permissible, but only if the initial acquisition of the policy was in good faith and there was no prior intent or agreement to transfer it to an otherwise disinterested investor.
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