Can I take out a life insurance policy on a stranger?

[CynicalGabe]

I am watching a report right now on CNN about how WalMart took out life insurance policies on its employees, and collected in some cases when the wage slave croaked.

Can someone take out a life insurance policy on someone I have no connection with? Say someone has been having a great couple of years on the SDMB Celebrity Death Pool, and I decide to put some money on that horse(s), would that be legal?

Note: I don't actually intend to do it, I just want to know if it is legal.

[Malacandra]

The principle where I come from - and I believe it's the general rule in the industry (which I'm loosely connected with) - is that you must actually have some interest in whether the person lives or dies; one instance would be a provider, another (I guess) is an employee, presumably on the grounds that as the employer you would suffer inconvenience or loss if the employee died as you would lose their services for the time it took you to find a replacement.

[Rick]

With any type of insurance you need what is called insurable interest. What is II?
I own a car, if it gets totaled I lose money. That is an insurable interest. However if your car gets totaled (not from an accident that is my fault) I suffer no loss and have no insurable interest. I cannot buy insurance on your car, or house for this reason.
With life insurance II is a little more esoteric. Everyone has an insurable interest in their own life. Fine
What about other people's lives? I have an insurable interest in my wife's life as her death will cause me financial hardship. Pretty easy to understand.
If you and I were in business together I would have an insurable interest in your life, as if you die, I need to buy out your survivors so I can continue the business. Again not too hard to understand.
Now let's suppose that our company has an ace engineer. Scotty the engineer is responsible for 60% of the company designs. if Scotty dies will there be a financial hardship on the company? Yes because Scotty is what is called a key man. he is key to our profits, and if Scotty takes a dirt nap we are screwed. So you and I can take a policy out on Scotty's life so if he kicks we get money to help us find a Jordy.
What WM has done is take this key man coverage and applied it to people that clearly not key to WM's profits. You would be hard pressed to make an argument that if Juan the janitor kicks it would have a negative effect on WM's profits.
Scummy? you bet.
Legal? Yes as far as I can tell.

[CynicalGabe]

How far can I stretch that interest?

Will I suffer if the Pope croaks? How much is my religious stability worth?

[Tangent]

Is this why Wal-Mart hires all those elderly people as greeters?

[Rick]

How far can I stretch that interest?

Will I suffer if the Pope croaks? How much is my religious stability worth?
What financial loss will you suffer if the pope takes a dirt nap? :dubious:

[Baffle]

The loss of wages from all the grieving I'll have to do, of course.

[C K Dexter Haven]

Way back when I studied underwriting (part of the actuarial exams), "insurable interest" wasn't well defined, nor a legal term, but a term used within the insurance industry. Each company set its own standards. A typical example was from long ago (early 1900s?) of an aunt who bought life insurance on her nephews, and they died under mysterious circumstances -- the aunt was tried for murdering them for the insurance money.

No insurance company wants to be party to such a situation, and hence the insurance company needs to convince itself that (a) the person buying the insurance (or the beneficiary) has an "insurable interest" and (b) that the amount of insurance is a reasonable reflection of that interest.

So, in the car example, if you have a 1990 clunker and try to buy a million dollars worth of insurance on it, you'll be turned down. They don't want the car reported "stolen," or being smashed by unknown vandals with sledge hammers overnight, or... They'll insure a car for replacement value.

Similarly, an adult child buying a million-dollar policy on a parent who is retired and has no income other than social security... wouldn't get very far. Reasonable amounts for life insurance reflect the loss of future income because the person dies, plus some small add-ons. Insurance isn't intended to be a financial windfall, but a protection against loss.

Rick has explained very well how a company can have an insurable interest in key employees. This seems a stretch, but I hope the amounts of insurance on the low-level position are fairly small. I'd hate to think of WalMart over-insuring aged employees and then offing them for the $$. Sounds like a plot for MONK, perhaps.

[Shalmanese]

Insurance companies would be happy for you to take out papal insurance because the more insurance you take out, the more money they make. Companies weren't taking out dead peasant policies for the payout, they were doing it as a tax dodge.

[yabob]

Insurance companies would be happy for you to take out papal insurance because the more insurance you take out, the more money they make. Companies weren't taking out dead peasant policies for the payout, they were doing it as a tax dodge.
Which is why some states were interested in passing "insurable interest" laws. The dodge loses them tax revenue. What is not clear is if the revenue loss was enough to make it worth it to put a stop to "dead janitor" or "dead peasant" policies, used by far more companies than WalMart.

I'm always somewhat bemused at extreme reactions to this practice, as if it somehow hurts the insured employee, or the employee's family is entitled to the money. It's odd, perhaps crass, but if your employer wants to take a policy out on you, which has nothing to do with your stated benefits, and pay the premiums, where's the injury? And if they are paying the premiums, they get to name the beneficiary. The injured party is the state, through the lost taxes.

[Gfactor]

Here is a previous thread on the insurable interest doctrine: http://boards.straightdope.com/sdmb/showthread.php?t=368335

[Chief Pedant]

The implication that WalMart did this to make money off the insurance proceeds is laughable and naive. Insurance companies aren't stupid and don't write policies unless they are pretty sure they can collect more on premiums than they pay in benefits. As mentioned above it is done for tax reasons.

The argument at hand is whether or not a corporation has an insurable interest in its replaceable employees, and whether or not a particular jurisdiction applies.

To the family of the croakee, it may well seem like a shameless corporation made money off of their demise. This flies in the face of this great country's core tort notion that relatives and attorneys should be the ones who get to make money off of people who croak, and corporations should be the ones who pay the money.

[yabob]

The implication that WalMart did this to make money off the insurance proceeds is laughable and naive. Insurance companies aren't stupid and don't write policies unless they are pretty sure they can collect more on premiums than they pay in benefits. As mentioned above it is done for tax reasons.

...
And these things are very profitable for the insurance companies. Given corporate tax rates, an outfit like WalMart is going to be willing to pay somebody a very handsome profit to get some tax sheltered dollars back, and write off the money payed as an expense.

[Gfactor]

And here is the story: http://news.tbo.com/news/metro/MGB5SEJVN3F.html

[Rick]

So, in the car example, if you have a 1990 clunker and try to buy a million dollars worth of insurance on it, you'll be turned down. They don't want the car reported "stolen," or being smashed by unknown vandals with sledge hammers overnight, or... They'll insure a car for replacement value. This is the same reason you can't buy 12 fire insurance polices on your house for its full replacement value, and expect them all to pay if your house burns down.

Similarly, an adult child buying a million-dollar policy on a parent who is retired and has no income other than social security... wouldn't get very far. Reasonable amounts for life insurance reflect the loss of future income because the person dies, plus some small add-ons. Insurance isn't intended to be a financial windfall, but a protection against loss.Actually with estate taxes, this one might fly if the insured's estate was large enough to warrant such coverage.

[Rick]

Which is why some states were interested in passing "insurable interest" laws. The dodge loses them tax revenue. What is not clear is if the revenue loss was enough to make it worth it to put a stop to "dead janitor" or "dead peasant" policies, used by far more companies than WalMart.
:confused: What taxes? The premiums for key man coverage are not deductible (at least they weren't when I was licensed). Life insurance is not considered income in the US.
Insurable interest laws predate dead peasant policies by a looong time.

[Gfactor]

:confused: What taxes?

According to the article I linked to before: "The chief appeal was that interest accrues over time on the money in such policies. When a worker dies, the employer collects without paying taxes on the gain."

From the same article: Myers said the policy payouts ranged from $50,000 to $80,000, depending on the person's age and gender. They were taken out on all full-time Wal-Mart employees who, in December 1993, were between ages 18 and 70 and participated in the medical benefits plan.

He said the company stopped taking out the policies in 1995 but continued to receive payouts on employees who died, even those who had left Wal-Mart.

Wal-Mart, which said it canceled its policies in early 2000 because it was losing money on the arrangement, says the program was intended to reduce its income taxes to help pay rising employee health care costs. Workers were notified and given the opportunity to opt out, the company said.

[Mr. Slant]

I'll submit that Wal-Mart does suffer a loss, albeit minor, when the janitor dies.
They may have to waste time calling for an ambulance if he croaks at work. The ambulance may impede traffic into the store. The employees may stand around gawking at revival efforts rather than doing their appointed tasks.
They'll have to replace him, which burns labor and management hours.
There's an off chance they'll wind up having to pay overtime to cover his shift, although given their peculiar institution of keeping most of their workers well under 40 hours, I bloody doubt it.
They'll have to train the new one. Even if he knows how to clean, it'll take a few hours training to get him familiar with the store and its routines. There'll also be paperwork expenses associated with hiring him.
Still, at the outside, what would all of that run?
$200?
$2000?

[Mr. Slant]

Insurance companies would be happy for you to take out papal insurance because the more insurance you take out, the more money they make. Companies weren't taking out dead peasant policies for the payout, they were doing it as a tax dodge.

Find me a company that'll write me pope insurance.
The age those guys are when they get the job, that could be nearly as much fun as horse betting!

[Kalhoun]

What financial loss will you suffer if the pope takes a dirt nap? :dubious:
Okay...I'm not arguing that we should be able to take out policies on strangers, but how does this work when a guy has a life insurance policy on his stay-at-home wife or one of his kids? There's no financial loss there. If pain and suffering is fair game, I get that, but the same could be said for my emotional state when John Lennon died. How do they determine this kind of policy?

[Gfactor]

Okay...I'm not arguing that we should be able to take out policies on strangers, but how does this work when a guy has a life insurance policy on his stay-at-home wife or one of his kids? There's no financial loss there. If pain and suffering is fair game, I get that, but the same could be said for my emotional state when John Lennon died. How do they determine this kind of policy?

It's complicated:

This lack of structure caused devastation and corruption in the marketplace, which drove England to make changes. In 1774 it issued The Life Assurance Act, which sought to establish an insurable interest in the form of a potential pecuniary loss stemming from a legal obligation that is suffered on the death of the insured. Put another way, the applicant for a policy on the life of another had to have a monetary interest in the continued life of the person who was insured, and not just in his or her death. If there was no such interest, the policy was voidable—that is, the insurer was under no obligation to honor the contract and pay the death benefit.
Over time, most states in the U.S. have codified the insurable interest rules to include a broader set of standards than those set forth in the 1774 Act. In addition to the presence of a pecuniary interest, most contemporary insurable interest statutes provide that an insurable interest can also be established by people who are related by blood. Although most states have codified the insurable interest rules, there remains a lack of uniformity in their interpretation and application. There are many cases in which identical, or nearly identical, statutes in different states have produced completely different results. For example, a court in one state may hold that a familial relationship alone is enough to support an insurable interest, while another state court may determine that there is not a strong enough pecuniary interest between parties to establish such an interest. It is important to keep in mind that the insurable interest rules normally do not apply to policies that are assigned. An assignee does not necessarily have to have an insurable interest. Historically, assignments have been used to cover debts and other obligations where a pecuniary interest exists. In recent years, there have been policies put in place with the premeditated plan of assigning and selling them to a third party in the settlement market. In the view of many, this practice has reintroduced an element of gambling, which runs counter to spirit of the insurable interest rule. However, case law supports the validity of assigning the policy or the death benefit after a policy has been issued. http://www.financialadvisormagazine.com/past_issues.php?id_content=3&idArticle=1435&idPastIssue=119

[LouisB]

At one time*, there were coin operated insurance policy machines in airport terminals. One could, for a couple of bucks, buy an insurance policy immediately prior to boarding the airplane. Of course the policy was good only for a specific flight, and IIRC, only one way. Anyway, I remember a story in the San Francisco Chronicle concerning a guy who hung out at the airport and solicited people to allow him to buy a policy on their lives---the guy said it was less expensive than a trip to Reno and the payout would be much better IF he hit the jackpot, so to speak.

For all I know, the story was apocryphal but if we assume it was true, would the buyer have been able to collect on a stranger's death?

*1940s, early 1950s IIRC

[Mr. Slant]

Okay...I'm not arguing that we should be able to take out policies on strangers, but how does this work when a guy has a life insurance policy on his stay-at-home wife or one of his kids? There's no financial loss there. If pain and suffering is fair game, I get that, but the same could be said for my emotional state when John Lennon died. How do they determine this kind of policy?


The stay-at-home-mom:
1. Costs money to bury
2. Provides a valuable service to the dad. He can compare her cost to the cost of day care, cooking and cleaning. In fact, there was a bogus study that did just that not too long ago.
3. Had the potential for going back to work after the kids get older, at least in theory.

The question on wifely services becomes replacement cost. How easily can he remarry and get the same quality of service from a replacement? How long will he be out of pocket for various services?

I suppose for kids the question would still cost money to bury. I can't think of any other arguments for carrying insurance on them, although there is the issue of carrying some extra to cover the medical care they'll likely receive in the process of passing. Not everything is covered under insurance.

[Doug Bowe]

I'll submit that Wal-Mart does suffer a loss, albeit minor, when the janitor dies....(snip)



And you just named it. The WSJ did an article on this several years ago.
Taking out a policy on a rank and file worker is called "Janitors Insurance."

[Bill Door]

This goes back many years, because I haven't seen one of these vending machines in years, but there used to be life insurance available in airports for dying in a plane crash. It only cost a couple of dollars. Every once in a while I'd give a couple of dollars to one of my colleagues who was going to the airport and ask them to buy some flight insurance in my name. "I don't know, I just feel lucky." I'd say.

Would I have been able to collect if the plane had gone down?

[Mr. Slant]

SNIP
Would I have been able to collect if the plane had gone down?

I would say that given your username that would most definitely have qualified as foul play.

[Khampelf]

Would I have been able to collect if the plane had gone down?

With those vending machine policies, isn't it most likely that the traveler has the paperwork in his pocket with him when the plane goes down, and nobody ever knows about it? What do you turn into the insurance co?

I'd wager those were nearly pure profit for the insurance companies.

[hajario]

With those vending machine policies, isn't it most likely that the traveler has the paperwork in his pocket with him when the plane goes down, and nobody ever knows about it? What do you turn into the insurance co?

Those were around as late as the 70's. They came with a postage paid envelope. You would put the policy in the envelope and the envelope in a mail box next to where you bought the policy.

[Rick]

Okay...I'm not arguing that we should be able to take out policies on strangers, but how does this work when a guy has a life insurance policy on his stay-at-home wife or one of his kids? There's no financial loss there. If pain and suffering is fair game, I get that, but the same could be said for my emotional state when John Lennon died. How do they determine this kind of policy?
Your wife dies in childbirth.
you have to bury her. You have to hire child care how many years? You have to possibly pay medical bills on your late wife, and perhaps the child. If you wife worked before the pregnancy you will not have her income to help support the family.
Yeah there is a loss there.

This goes back many years, because I haven't seen one of these vending machines in years, but there used to be life insurance available in airports for dying in a plane crash. It only cost a couple of dollars. Every once in a while I'd give a couple of dollars to one of my colleagues who was going to the airport and ask them to buy some flight insurance in my name. "I don't know, I just feel lucky." I'd say.

Would I have been able to collect if the plane had gone down?Sure you could have, everyone has an insurable interest in their own life. Your coworker was buying the policy on his own life. I could buy one of those policies and name you the beneficiary, it would be legal. It might go against the underwriting rules of the issuing company, but it is legal. Once the policy is issued (not applicable to a travel policy) the owner can name anyone as beneficiary. No restrictions whatsoever. You could name your dog the beneficiary. not a good idea, but you could and it would be legal.
Oh The Sonoran Lizard King as hajario said you mailed the policy out. Yeah they would pay off, but how often does a commercial airliner crash? The insurance company would be happy to pay out a claim, because they had sold sixty two gazillion policies that they did not have to pay off on.

BTW, I think those machines are still in airports I'll look tomorrow when I hit the airport.

[Khampelf]

Those were around as late as the 70's. They came with a postage paid envelope. You would put the policy in the envelope and the envelope in a mail box next to where you bought the policy.

Ahhh. Thank you. As soon as I posted, I thought about a carbon copy deposited in the vending box, or something. I still imagine those policies were cash cows for the insurance companies.

I'm old enough to vaguely remember them, but not the specifics.

[Bill Door]

Ahhh. Thank you. As soon as I posted, I thought about a carbon copy deposited in the vending box, or something. I still imagine those policies were cash cows for the insurance companies.

I'm old enough to vaguely remember them, but not the specifics.

Sure they were. It had a worse payout than the lottery, but you've got to be in it to win it.

[Gfactor]

Here is a good article about flight insurance: http://findarticles.com/p/articles/mi_qn4182/is_19960805/ai_n10095767

[Gfactor]

As of 2000: Travelex sells $500,000 worth of flight insurance coverage for $18. Add $1 to the price and you get a three-day package with baggage and medical insurance, Ambrose said. http://findarticles.com/p/articles/mi_qn4155/is_20000103/ai_n9599265

[Voyager]

BTW, I think those machines are still in airports I'll look tomorrow when I hit the airport.
I remember them well, but I haven't seen one in years. (Not even in Vegas. :) )They used to be all over the place, though.

[spifflog]

What WM has done is take this key man coverage and applied it to people that clearly not key to WM's profits. You would be hard pressed to make an argument that if Juan the janitor kicks it would have a negative effect on WM's profits.
Scummy? you bet.
Legal? Yes as far as I can tell.

I know is America today, we are rquired to love mom, apple pie and hate Walmart. But why is it scummy? The insurance icompany s letting WM take out the policy, presumably to make money. And WM isn't going to kill the guy. What's the big deal?

[Kalhoun]

It's complicated:

http://www.financialadvisormagazine.com/past_issues.php?id_content=3&idArticle=1435&idPastIssue=119
Ok. I'm starting to understand. So...does this exclude an unmarried gay couple from taking out life insurance policies on each other? What if one member of this couple doesn't work and never did...i.e., one partner completely supported the other throughout the relationship?

[Kalhoun]

Your wife dies in childbirth.
you have to bury her. You have to hire child care how many years? You have to possibly pay medical bills on your late wife, and perhaps the child. If you wife worked before the pregnancy you will not have her income to help support the family.
Yeah there is a loss there.


That scenario makes sense. What if you have a policy on a 4-year old child? Say the kid drowns or is hit by a car. No medical bills incurred. Will a policy pay in that case?

[Gfactor]

Ok. I'm starting to understand. So...does this exclude an unmarried gay couple from taking out life insurance policies on each other? What if one member of this couple doesn't work and never did...i.e., one partner completely supported the other throughout the relationship?

As my esteemed colleauge, Rick, has pointed out, it's not that tough to work around the insurable interest doctrine. Even if a state didn't recognize an insurable interest in that case, the partner whose life is getting insured could buy the policy and make the other partner a beneficiary. Also, the insurable interest doctrine generally doesn't prohibit transfers of existing policies.

[plnnr]

I remember them well, but I haven't seen one in years. (Not even in Vegas. :) )They used to be all over the place, though.

In that wonderfully bad movie Airport starring Burt Lancaster, Dean Martin, and Helen Hayes (IIRC, she won an Oscar for her role), the man who blows himself up and rips a hole in the plane purchases flight insurance just as he's getting on. He names his wife as the beneficiary and the ticket agent is the one who offers to post the insurance policy for him.

Not that Hollywood is exactly known for its veracity, but it was portrayed.

[Rick]

Kalhoun Yes a gay couple could (and I sure do) buy life insurance on their own lives and name their partner as beneficiary. As I said, everyone has an insurable interest in their own life.
As far as children go, yes a lot of life insurance is sold to kids. I bought policys on each of my children when there were small. Now they are adults, and have a policy based on the rates when they were little.
The only time either of the above scenarios would raise an eyebrow at the insurance company was if the amounts were way the hell out of line. if Joe six pack wants to buy a 2.5 million dollar policy on both of his kids, the underwriter would probably go :dubious:

[chowder]

I know is America today, we are rquired to love mom, apple pie and hate Walmart. But why is it scummy? The insurance icompany s letting WM take out the policy, presumably to make money. And WM isn't going to kill the guy. What's the big deal?

>>hijack<<< Why are you taught to hate WM.

I don't get this at all, it's a store :confused:

[Gfactor]

That scenario makes sense. What if you have a policy on a 4-year old child? Say the kid drowns or is hit by a car. No medical bills incurred. Will a policy pay in that case?

I had quoted a paragraph from Keeton & Widiss, and insurance law treaty, but the hamsters ate it. Let me summarize:

1. There will still be funeral costs. http://www.iii.org/individuals/life/special/child/

2. Courts are willing to relax the insurable interest doctrine somewhat in the case of family members. By extension, they don't strictly apply the principle of indemnity to family member-life insurance.

3. In fact, life insurance, generally isn't subject to the principle of indemnity, at least generally, in most states. If I'm the beneficiary of a $250,000 life insurance policy, I don't have to prove up losses of $250,000 in order to recover full benefit. I just have to prove that the insured is dead.

4. There were some issues, historically, with child life insurance.* It was sold door-to-door based on the funeral costs theory. Parents would buy it and pay premiums with money they could have spent on medical care and food.

*based on an insurance law lecture from long ago given by this guy http://news-info.wustl.edu/sb/page/normal/733.html . I could be misinformed or have it all jumbled up in my head.

[Mr. Slant]

>>hijack<<< Why are you taught to hate WM.

I don't get this at all, it's a store :confused:

Google
Wal-Mart sucks
and spent 15 minutes reading the results.

It's complicated, and the answer is off-topic in this thread.

[OneCentStamp]

What financial loss will you suffer if the pope takes a dirt nap? :dubious:
He sells t-shirts with the Pope's face in one of those Ghostbusters-style red crossout circles. New pope = lots of unsellable inventory. :cool: