Buying and Selling Life Insurance Policies in New York

A ruling by the New York Court of Appeals has paved the way for individuals to buy life insurance policies and transfer them as investments.  Kramer v. Phoenix Life centered on attorney Arthur Kramer’s acquisition of several life insurance policies totaling $56.2 million in coverage that were subsequently sold to unaffiliated investors.  The issue before New York’s highest court was whether the sale of those insurance policies to persons with no insurable interest was appropriate.

In a 5-2 decision, the Court upheld the sale, finding that New York’s insurable interest rules did not prevent an insured from obtaining a policy on their life and thereafter transferring the policy to an individual with no insurable interest.

New York’s insurance law defines an insurable interest as:

 . . . in the case of persons closely related by blood or by law, a substantial interest engendered by love and affection or, for others, a lawful and substantial economic interest in the continued life, health or bodily safety of the person insured.

Further,

 Any person of lawful age may on his own initiative procure or effect a contract of insurance upon his own person for the benefit of any person, firm, association or corporation. Nothing herein shall be deemed to prohibit the immediate transfer or assignment of a contract so procured or effectuated.

However,

No person shall procure or cause to be procured, directly or by assignment or otherwise any contract of insurance upon the person of another unless the benefits under such contract are payable to the person insured or his personal representatives, or to a person having, at the time when such contract is made, an insurable interest in the person insured.

Applying the statutory text, the Court noted that, “There is simply no support in the statute for plaintiff and the insurers’ argument that a policy obtained by the insured with the intent of immediate assignment to a stranger is invalid. The statutory text contains no intent requirement; it does not attempt to prescribe the insured’s motivations.  To the contrary, it explicitly allows for ‘immediate transfer or assignment’ (Insurance Law ‘ 3205[b][1]).  This phrase evidently anticipates that an insured might obtain a policy with the intent of assigning it, since one who ‘immediately’ assigns a policy likely intends to assign it at the time of procurement.”

In sum, New York law was found to permit a person to procure an insurance policy on his or her own life and immediately transfer it to one without an insurable interest in that life, even where the policy was obtained for just such a purpose.

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