Delaware court affirms policyholders can sell life insurance

Sep 28, 2011

The Delaware Supreme Court recently ruled on the validity of life insurance policies that are sold to investors by the policyholders.

A recent pair of Delaware Supreme Court decisions affirmed the common law allowing a legally insured person or insurable trust to sell a life insurance policy for market value as long as the purchase of the policy was not part of a prior agreement to resell to an investor or part of an illegal wager. The arrangement is illegal if an investor has a pre-negotiated deal to procure ownership of the policy, and there is no insurable interest on the part of the original owner.

Life and Health Insurance News reported that the court ruled the intent of the insured to sell a policy is irrelevant, and the sale of the policy is legal if the insured had an insurable interest and there was no prior arrangement with the new buyer. In a decision for the court, Delaware Chief Justice Myron Steele wrote that the secondary market for life insurance is legal and often strictly regulated by state governments.

"Virtually all jurisdictions, nevertheless, still prohibit third parties from creating life insurance policies for the benefit of those who have no relationship to the insured," Steele wrote. "These policies, commonly known as 'stranger originated life insurance [STOLI]," ... lack an insurable interest and are thus an illegal wager on human life.”

According to Reuters, U.S. law requires policyholders to have an interest in keeping the insured individual alive. But the rules loosened after policyholders and financiers realized the benefits of allowing a policyholder to cash out his or her policies. This evolved into people buying policies specifically to be resold to investors, leading insurers to question the validity of many policies. But the news source reported that most policies state they cannot be challenged after two years, thus holding providers to the policies' benefits. 

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