New York Court Validates Resale of Life Insurance Policies

By | November 18, 2010

New York’s highest court Wednesday said it was legal for residents of the state to take out life insurance on themselves and immediately sell the policy, a ruling seen as having substantial implications in the so-called “life settlement” market.

A federal court had asked the New York State Court of Appeals, as part of a separate ongoing case, to rule on the question of whether state law prohibited someone from taking out insurance and then selling the policy to someone without an “insurable interest” in the person’s life.

In essence, the court had to decide whether it was legal under state law for someone to take out life insurance on themselves expressly for the purpose of selling that policy to a stranger — someone who has no actual financial interest in the person’s life but would collect the benefits under the insurance policy when the person died.

The court ruled nothing in state law prevented such a practice.

The original request for the New York court’s ruling came out of a federal case involving the widow of prominent New York lawyer Arthur Kramer. Arthur Kramer bought a series of policies and sold them on.

When he died his widow filed suit, claiming the policies should be paid to her since the new owners had no financial interest in her husband’s life. The U.S. Court of Appeals for the Second Circuit asked the New York court to clarify the question of state law as it applied to the case.

The basic idea of selling a life insurance policy for money upfront and then allowing the buyer to collect the (larger) payout when the insured person dies is at the heart of the life settlement market, a $7.6 billion business in 2009 by industry estimates.

Lawyers and insurance executives at an Ernst & Young conference in New York said the ruling had serious implications on billions of dollars in existing insurance.

“There is a big pool of policies that this case will have a very, very big impact on,” said David Goldman, director of the longevity markets group at Credit Suisse.

(Reporting by Ben Berkowitz; editing by Carol Bishopric)

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