Spin-Life Insurance Policies: A Dizzying Effect on Human Dignity and the Death of Life Insurance
Alt, Anthony, Ave Maria Law Review
There's no such thing as a free lunch. (1)
Since ancient times, people have recognized the usefulness of money because of its capacity to facilitate the exchange of goods. (2) Indeed, it would be difficult to find someone in modern American society that would refuse a "free" gift of $340,000. Yet such offers exist today in the form of speculator-initiated life insurance policies ("SPIN-Life"). (3) Consider the following letter from an attorney to a senior citizen:
I have been working with certain bankers, life insurance professionals and actuaries who, along with me, can assist you with gaining access to ... funds to provide a benefit to your family or to your favorite charity in a little more than two years at no cost to you through non-recourse "premium financing." We can accomplish this by using your excess "insurance capacity." This program is offered to individuals who are between the ages of 75 and 90 and who have a net worth in excess of $5,000,000. Following is a simple example to demonstrate the concept: John Smith is 80 years old. He [h]as a net worth of $10 million and has $2 million of existing insurance on his life. [Our law firm] will work with John to take advantage of his excess "insurance capacity" (approximately $8 million) to purchase a new life insurance policy on John (with an $8 million death benefit). During the underwriting process, we arrange for a "premium finance company" to agree to pay the premiums on John's behalf for the first 24 months (on a "non-recourse" basis, so John has no financial risk). Therefore, John will own the policy but will not be obligated to pay the annual premiums (which in this example could be approximately $300,000 per year including accrued interest). After 24 months have passed, John's health and the policy's fair market value will be reevaluated. Offers to purchase the policy will be obtained from "life settlement" companies and the best offer will be selected. John then sells the policy to a life settlement company (usually in the range of 10-15% of the death benefit). Since the policy in this example had a death benefit of $8 million, the sale price could range between $800,000 and $1.2 million. The sale proceeds must first repay the "non-recourse" loan to the "premium finance company," then John (or his designated beneficiary) will receive the excess, if any. In this example, assuming a $1 million sale price and a repayment of $600,000 to the "premium finance company," John will receive $400,000--this amount will be treated as a long-term capital gain currently taxed at 15%, netting John $340,000 after taxes! I have enclosed the necessary forms to begin the insurance underwriting process. If you are interested in applying for this program, please complete the forms and return them in the enclosed envelope.... I look forward to working with you on this amazing opportunity! (4)
Receiving such a letter appears to be an amazing opportunity indeed. Such an opportunity, however, although seemingly free, comes with a cost. This Note shows that SPIN-Life insurance policies contradict the nature and purpose of life insurance and should be considered securities or wagers, not insurance contracts; make human lives a commodity; violate current insurable interest laws and public policy against wager contracts; and should be declared void ab initio.
Part I of this Note provides an overview of the nature and purpose of insurance in general. Part II explains the requirement of an insurable interest and how such a requirement relates to an insurance contract. Part III sets forth a brief explanation of life insurance in particular, and how the insurable interest requirement makes a life insurance contract distinct from other contracts. Part IV delineates what SPIN-Life policies are, how they differ from other life insurance policies, and why they are problematic. …