Florida seeks ban on uncommon life insurance practice

Millions of Americans look to buy life insurance for perfectly understandable, traditional reasons. Traditional life coverage is often purchased to institute a financial safety net for loved ones in the event of one's own demise. However, another reason for buying such coverage – not for loved ones but often for complete strangers – may soon be banned in the state of Florida.

The phenomenon of “stranger-initiated” life coverage has gained some traction in recent years, but Florida lawmakers want to nip it in the bud, according to a report from the South Florida Sun-Sentinel. Florida State Rep. Cyndi Stevenson, a Republican representing St. Augustine, recently told the state's House Subcommittee on Insurance and Banking that she will advance a bill this week to ban this type of transaction.

Florida may ban a certain type of life insurance transaction.

What's the issue?
As stated in the report, Stevenson said that while traditional life coverage is a perfectly reasonable investment for many Floridians, stranger-initiated coverage is inherently different and perhaps a bit underhanded. The practice involves investors – often financial institutions such as hedge funds – buying life coverage for people they don't know. These investors continue to pay the premiums, eventually allowing them to profit from the death of a relative stranger. Due to the cost of speculation involved, investors often try to take out coverage on the terminally ill or elderly because the payout is more likely to come sooner than later.

Stevenson told the subcommittee that this practice is “in direct violation of the insurable interest laws designed to ensure that the person who is a beneficiary of a life insurance policy has a continued interest in the economic life, not the death, of the insured,” the report said.

How does it work?
In order for investors to get relative strangers to sign off on these policies, there is often an offer that's presented as mutually beneficial, the report said. For instance, prospective people will be taken out to dinner or given a free vacation, or have other insurance premiums paid for a year or two. They will typically also get cash up front in exchange for signing their life insurance benefits over to the investors.

Under the soon-to-be proposed law, though, stranger-initiated coverage in Florida would be banned altogether and there would be a five-year ban of sales of life insurance to any third parties, the report said. Further, any current stranger-initiated policies that are in effect today (that is, being paid but the person in question has not yet passed away) would instantly become null and void.
And it looks as though the bill has a lot of support, the report said. It passed the House subcommittee 10-1, and a similar version of the bill has already been introduced in the state Senate.
This is obviously something that life insurers will have to look at carefully as time goes on, because any sort of changes to the laws surrounding them could impact the ways in which these companies do business going forward.