Insurable Interest Requirement (Life = Insurance)

From: Subject: Insurable Interest Requirement (Life Insurance) Date: Tue, 17 Jun 2008 07:44:20 -0400 MIME-Version: 1.0 Content-Type: multipart/related; type="text/html"; boundary="----=_NextPart_000_0000_01C8D04D.F3DEC020" X-MimeOLE: Produced By Microsoft MimeOLE V6.00.2900.3198 This is a multi-part message in MIME format. ------=_NextPart_000_0000_01C8D04D.F3DEC020 Content-Type: text/html; charset="Windows-1252" Content-Transfer-Encoding: quoted-printable Content-Location: http://www.ins.state.ny.us/ogco2008/rg080502.htm Insurable Interest Requirement (Life = Insurance)

3D"New
STATE OF NEW=20 YORK
INSURANCE DEPARTMENT
25 BEAVER STREET
NEW = YORK,=20 NEW YORK 10004

David A.=20 Paterson
Governor

Eric R.=20 = Dinallo
Superintendent

The Office of=20 General Counsel issued the following opinion on May 6, 2008 representing = the=20 position of the New York State Insurance Department.

Re: Insurable Interest Requirement (Life = Insurance)

Question Presented:

Would the issuance of a policy of life insurance in = the=20 below-described proposed transaction be consonant with the insurable = interest=20 requirements of N. Y. Ins. Law =A7 3205 (McKinney 2007)?

Conclusion:

Yes. Assuming that all of the pertinent facts are as = described,=20 a policy of life insurance issued in connection with the proposed = transaction=20 described below would not violate the insurable interest requirements of = Insurance Law =A7 3205.

Facts:

The counsel to a retired individual (the = =93Insured=94) who wishes=20 to engage in a transaction (the =93Plan=94), the relevant facts of which = are as=20 follows:

1. The Insured desires to direct his = self-directed=20 Individual Retirement Account (=93IRA=94) to make an investment in = the form of a=20 promissory note (=93Note=94) to a non-profit corporation = (=93Charity=94).

2. The Note provides for interest only payments = until the=20 principal amount of the Note is due, the earlier of 20 years or the=20 Insured=92s date of death.

3. To insure the ultimate repayment of the = principal amount=20 of the Note, the Insured and Charity desire to have the Charity = apply for an=20 insurance policy (=93Policy=94) on the Insured=92s life in an amount = equal to the=20 face amount of the Note. The Insured has a good faith intention to = obtain=20 insurance for the benefit of their Charity.

4. The Insured is of lawful age and an active = contributor=20 to the Charity. The Insured has a demonstrated history of providing = either=20 substantial contributions or service to the Charity. The Charity has = an=20 inherent interest in the continued longevity of the Insured as a = result of=20 such contributions.

5. The Charity will be the sole owner and = beneficiary of=20 the Policy. The Charity plans to maintain the Policy until the death = of the=20 Insured.

6. The Policy will provide that the death = benefits will be=20 collaterally assigned to the IRA to the extent of any outstanding = balance on=20 the Note upon the Insured=92s date of death.

7. The premiums are paid by the Charity from the = proceeds=20 of the loan evidenced by the Note.

8. Neither the Insured nor Charity have any intention to use the = policy=20 for any type of viatical settlement, senior life settlement or for = any other=20 secondary market.

9. There are no third-party financiers or = investors related=20 to the Policy.

10. There is no assignment of the ownership of = the Policy=20 contemplated under the Plan.

11. The beneficiary of the IRA is the Insured=92s = family or=20 the Charity.

Analysis:

The Plan is a method of utilizing an individual=92s = self-directed=20 IRA to provide funding to a charity without adverse income tax = consequences. A=20 key element of the Plan is the purchase of a life insurance policy by = and for=20 the benefit of a charity.¹

Insurance Law =A7 3205 is germane to this inquiry. = That statute=20 defines =93insurable interest,=94 and sets forth the standards for = determining where=20 an insurable interest exists. The statute provides, in relevant part, as = follows:

(a) In this section:

(1) The term, "insurable interest" = means:

(A) in the case of persons closely related by = blood or by=20 law, a substantial interest engendered by love and = affection;
(B) in=20 the case of other persons, a lawful and substantial economic = interest in=20 the continued life, health or bodily safety of the person insured, = as=20 distinguished from an interest which would arise only by, or would = be=20 enhanced in value by, the death, disablement or injury of the=20 insured.

* * * *

(b) (1) Any person of lawful age may on his own = initiative=20 procure or effect a contract of insurance upon his own person for = the=20 benefit of any person, firm, association or corporation. Nothing = herein=20 shall be deemed to prohibit the immediate transfer or assignment of = a=20 contract so procured or effectuated.

(2) No person shall procure or cause to be = procured,=20 directly or by assignment or otherwise any contract of insurance = upon the=20 person of another unless the benefits under such contract are = payable to the=20 person insured or his personal representatives, or to a person = having, at=20 the time when such contract is made, an insurable interest in the = person=20 insured.

(3) Notwithstanding the provisions of paragraphs = one and=20 two of this subsection, a Type B charitable, educational or = religious=20 corporation formed pursuant to paragraph (b) of section two hundred = one of=20 the not-for-profit corporation law, or its agent, may procure or = cause to be=20 procured, directly or by assignment or otherwise, a contract of life = insurance upon the person of another and may designate itself or = cause to=20 have itself designated as the beneficiary of such=20 contract.

* * * *

Insurance Law =A7 3205(b)(3) represents an expansion = of the class=20 of parties that have an insurable interest in the life of the insured. = That=20 paragraph was enacted pursuant to the Laws of 1996, chapter 510, and = amended (to=20 eliminate the five year =93sunset=94 provision of the original) by the = Laws of 2001,=20 chapter 146. The purpose of the provision is noted in the following = excerpt from=20 a letter dated July 1, 1996, from the Superintendent of Insurance to the = Governor=92s Counsel:

The [New York State Senate] memorandum in support = of the=20 bill states that the ability of charities to be able to procure life = insurance policies on their behalf offers a new method of fund = raising for=20 these organizations. It appears that the intent of the bill is to = permit=20 donors to enter into long term gift giving arrangements which result = in=20 posthumous endowments to the religious charitable and educational=20 organizations.

In essence, the bill confers these charitable, = religious=20 and educational corporations with an insurable interest in the lives = of=20 their donors. This would expand the definition of insurable interest = and=20 presumably permit these organizations to solicit potential donors to = enter=20 into long term gift giving programs.

The current law permits donors by assignment of = an existing=20 life insurance policy to enter into long term gift giving = arrangements=20 resulting in posthumous endowments. Section 3205(b)(1) was amended = by=20 Chapter 334 of the laws of 1991 to proclaim the public policy of = this state=20 that an individual may voluntarily insure his or her life for the = benefit of=20 any person, firm, association or corporation and that the individual = may=20 immediately assign or transfer the contract to any other entity. =85 = The bill=20 would permit a direct solicitation by department licensees. Thus, a = licensed=20 insurance agent can assist in the procurement of a new life = insurance policy=20 on the life of a donor, and the charitable organization would be the = policyowner and beneficiary.

Based on the above discussion, the Department = recommends=20 approval of the bill.

1995-1996 NYS Insurance Department Legislative Diary, = Volume 5,=20 Page 103.

The above-described amendment to Section 3205(b) = imbues=20 charitable organizations with an insurable interest in the lives of = their=20 donors. As a practical matter, it was enacted to better enable = charitable=20 organizations to obtain life insurance policies on the lives of their = donors, in=20 that it allows for the direct solicitation of charitable organizations = by=20 licensees of the Department, and thus eliminates, in the charitable = donation=20 context, the intervening step of requiring a donor to first purchase the = policy=20 and then transfer the policy to the organization.

In the transaction proposed, the Charity will be = purchasing a=20 policy on the life of the Insured. The premiums for the policy will be = paid=20 using a portion of the proceeds of the loan evidenced by the Note issued = to the=20 Insured=92s self-directed IRA. The Charity will be the named beneficiary = of the=20 policy, and the Insured=92s IRA will have a security interest in the = policy=20 proceeds in order to secure repayment of the Note. Upon the death of the = Insured=20 prior to the end of the 20 years, the death benefit will be paid to the = Charity,=20 and the Charity would apply the proceeds to the repayment of the = principal=20 balance remaining outstanding on the Note. Any amounts in excess of the=20 principal balance will be retained by the Charity.

This is not the first time that the Department has = been asked=20 for its opinion regarding a novel application of the rule set forth in = Insurance=20 Law =A7 3205(b)(3). In OGC Opinion No. 03-07-39 (July 7, 2003), the = Department=20 considered a proposal to raise funds through a securitization = arrangement, with=20 the proceeds therefrom to be used to purchase life insurance and annuity = contracts on a pool of at least 100 individual donors. In that = arrangement, the=20 annuity income and proceeds from the maturing life policies were to be = first=20 applied to the debt service on the securities, and only a small = percentage of=20 the value of any policy purchased with respect to a donor would ever be = realized=20 by a charitable beneficiary. The Department concluded that the proposed=20 arrangement was not consistent with the purpose of Insurance Law =A7 = 3205(b)(3)=20 chiefly because the transaction seemed structured more for the benefit = of=20 third-party investors than for the ostensible charitable beneficiary. =

Here, by contrast, the Plan differs significantly = from that=20 prior proposal in that there are no unrelated third parties who stand to = reap=20 the vast majority of the benefits of the insurance procured. In = addition, the=20 Plan does not involve or contemplate a life settlement or other = prearranged=20 assignment of the policy as a means of evading the Insurance Law=92s = insurable=20 interest requirement. Accordingly, assuming that all of the pertinent = facts are=20 as described, a policy of life insurance issued in connection with the = Plan=20 would not violate the insurable interest requirements of Insurance Law = =A7 3205.=20

Please note that the conclusion herein does not = preclude the=20 Department from finding, in the event that different or additional facts = apply,=20 that the insurable interest requirement of Insurance Law =A7 3205 may = not be=20 satisfied by a purportedly similar transaction.

For further information you may contact Supervising = Attorney=20 Michael Campanelli at the New York City office.

__________________________________________________________= _________________________________________

¹The proposed transaction was addressed = by the=20 Internal Revenue Service (=93IRS=94) in Private Letter Ruling 200741016 = (October 5,=20 2007). In that Letter Ruling, the IRS concluded that the proposed = transaction=20 was not a =93prohibited transaction=94 within the meaning of Internal = Revenue Code=20 (=93I.R.C.=94) =A7 4975, and that the transaction does not constitute a = prohibited=20 investment in insurance within the meaning of I.R.C. =A7 408(a)(3).=20

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