Third-Party Ownership and Life Settlements

When Can Someone Other Than the Insured Own the Policy?

The policyowner controls the contractual rights. The insured is the person whose life is covered. In third-party ownership, those roles belong to different people or entities.

• When the contract permits, the owner can request a policy loan or change a revocable beneficiary, a designation that can be changed under the policy's procedure. Assignments and protected beneficiary interests can limit these rights.
• A family member, business, or trust may be a legitimate owner when the arrangement satisfies the required insurable interest and other applicable requirements.
• Insurable interest means the owner has a recognized family relationship or a lawful financial interest in the insured's continued life. Exact legal requirements depend on the jurisdiction and facts.
• A business can have a genuine interest in a key employee when that employee's death would cause a financial loss.
• If a trust owns the policy, an authorized trustee acts for the owner. The insured, beneficiary, or premium payer does not gain the owner's authority merely by filling that role.
• Review the proposed owner, insured, beneficiary, reason for coverage, premium funding, and any planned transfer when the application is made.

Example: A company owns coverage on a key employee because the employee's death would disrupt operations. The company is the owner and beneficiary; the employee is the insured. The business purpose supports the arrangement, subject to the applicable insurable-interest and consent requirements.

How Does Investor-Originated Coverage Differ?

Stranger-originated life insurance (STOLI) and investor-originated life insurance (IOLI) describe new coverage arranged from the beginning for an unrelated investor's planned acquisition or profit at death, rather than a genuine insurance need.

State law controls the legal treatment. Do not import one state's prohibition, waiting period, or procedure into a general-knowledge question. Focus on initial purpose, insurable interest, funding, control, and any prearranged transfer.

Exam Tip: Gotchas

• A temporary owner's name does not prove a genuine insurance purpose when investor funding and control were arranged from the start.
• A later legitimate sale of an existing policy is different from coverage created as an investor wager.

What Is a Life Settlement?

A life settlement is a sale or transfer of an existing life policy to a third-party buyer for value.

• The buyer becomes the owner and generally pays future premiums.
• The buyer receives the death benefit when the insured dies, subject to the policy and transaction terms.
• The seller receives current value but gives up the transferred rights and may end the family's protection.
• The policy can later be resold, so the insured's information and the policy's ownership may pass to additional parties under applicable disclosure rules.

The policy's surrender value does not set an outside buyer's offer. Compare a settlement with surrender, loans, withdrawals, reduced coverage, accelerated benefits, and any other available contract choices.

Exam Tip: Gotchas

• A life settlement transfers the policy to a buyer. Surrender ends it with the insurer. Those transactions can produce different values and consequences.

What Should the Owner Compare Before a Transfer?

Separate the price calculation from the legal, tax, privacy, and benefit questions.

Net-offer example:

• Offer A is $120,000 with a $9,000 seller fee.
• Offer B is $114,000 with a $1,000 seller fee.

1. Offer A net cash: $120,000 − $9,000 = $111,000.
2. Offer B net cash: $114,000 − $1,000 = $113,000.
3. Offer B has the lower quoted price but provides $2,000 more before taxes.

Then review the remaining consequences separately:

• Authority: Verify that the policyowner, or an authorized representative of a business or trust owner, approves the transfer.
• Future protection: Identify whether the family keeps any death protection after the sale.
• Premiums and proceeds: Identify who pays future premiums and who receives the death benefit.
• Fees and taxes: Compare net offers and obtain fact-specific tax advice. Life-settlement proceeds are not automatically tax-free.
• Privacy: Determine who may receive medical, identity, address, and life-expectancy information, including a later purchaser.
• Public benefits: Review how the cash may affect each applicable means-tested program, which checks income or resources. Medicaid treatment can vary by state and eligibility group.
• Creditor and resale effects: Review whether creditors can reach the proceeds and whether the buyer may resell the policy.
• State requirements: Life settlements are regulated at the state level. Verify the applicable requirements without assuming that one state's procedure applies nationwide.

A favorable price does not answer the authority, privacy, tax, public-benefit, or family-protection questions.

What Should You Check on Exam Day?

• Who owns the policy, whose life is covered, who pays premiums, and who receives proceeds?
• Was there a genuine family or business purpose and required insurable interest, or was investor funding or control arranged from the start?
• Is the transaction a sale to a buyer or a surrender to the insurer?
• After the transfer, who pays premiums, who receives the death benefit, and what protection remains for the family?
• Which fees, taxes, privacy disclosures, public-benefit effects, creditor issues, and state requirements still need review?