Life insurance products must be distinguishable from financial instruments by including time-tested insurance safeguards. Congress should exercise its authority under the McCarran-Ferguson Act to permit insurance providers to offer and negotiate insurable interest as a contract term, and to price such policies accordingly.
State law mandates that a life insurance policy owner must have an insurable interest in the insured at the time of purchase. This does not apply to the transfer of ownership after the policy is in force. Life settlement companies purchase these policies for approximately one-third of the death benefit, becoming the owner and paying the remaining premiums. The company then receives the full death benefit when the insured dies.
Recent state legislation permits policy forfeiture in exchange for Medicaid benefits to the insured. The Medicaid applicant forfeits the life insurance policy in exchange for Medicaid qualification. Either the state or a third-party investor receives the death benefit when the insured dies, who may not be the policy owner.
Texas, Kentucky, Kansas, and Indiana have passed such legislation, and other states are actively considering proposals. At the time of contract formation, life insurers did not price these policies to cover payouts encouraged by this legislation. These financial losses will subsequently be passed to consumers, and jeopardize the future affordability of life insurance.
Heather Harris, LIFE INSURANCE—INSURABLE INTEREST AND THE FREEDOM OF CONTRACT: WHY MEDICAID SETTLEMENT LEGISLATION CRACKS THE FOUNDATION OF THE LIFE INSURANCE INDUSTRY, 38 W. New Eng. L. Rev. 177 (2016), https://digitalcommons.law.wne.edu/lawreview/vol38/iss2/1