New York’s top court ruled Wednesday that state law allows people to buy life insurance policies and immediately sell them to investors who make money when the insured person dies. The Court of Appeals, in a 5-2 ruling, said the practice is legal in New York even where the policy was obtained solely for that purpose. The case involved transactions before the law was amended by the Legislature last year to regulate so-called “stranger originated life insurance,” or STOLIs. Those changes took effect in May. The amendment prohibits intermediaries, without any personal interest in an insured individual, from arranging or planning in advance for someone to obtain a policy and designate the intermediary as beneficiary. It also prohibits such transfers, or life settlement contracts, for two years after a policy is issued.

The court majority concluded that state law permits an insured adult, acting “on his own initiative,” to get a life insurance policy for the benefit of any person, firm, association or corporation he or she chooses.  According to the American Council of Life Insurers, more than 30 state have enacted laws in the last few years to curb or regulate the practice.

Questions:

1.  What is “dead peasant” insurance, why has it been in the news in recent years,  and what are some recent regulations to it?

2.  Why do you think the court included a two year waiting period?

3.  If a person obtained a life insurance policy for the benefit of a non-profit organization, how should the non-profit organization account for it? Discuss.

 

Source:

Staff. (2010). New York Court OKs Reselling Life Insurance, Syracuse.com, November 17. (Retrievable online at http://www.syracuse.com/news/index.ssf/2010/11/new_york_court_oks_reselling_l.html)