[QUOTE=Bill Door]
The quote you gave included this phrase *“Without this requirement, it would be very easy to make a living by purchasing life insurance policies on elderly strangers, and then collecting the proceeds when they died.” * which I have to question. How would it be possible to make a living doing this? Surely the insurance policies are set up according to the actuarial tables so that no one could profit from such an arrangement, at least long term. If I wanted to insure the lives of a bunch of 90 year old people, the yearly premiums will be high enough so that the insurance company makes a profit, whether I have an insurable interest or not.
It implies that life insurance is a money making proposition, which it most assuredly is not, no more than lottery tickets.
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I agree. The second reason given in the quoted material–the risk of hastening the death to collect on the policy (this is called “moral hazard”)-- seems more persuasive. Life insurance for the elderly is expensive and would theoretically be underwritten so that it is a winning proposition for the insurer–not the insured. The payout is the same regardless of the owner or beneficiary of the policy. On any individual policy and insurer may lose money (if the insured dies a few months after the policy is issued, for example), but on average, they will win. Ditto Casinos. In fact, both industries are similar in two ways. They like “winners,” because they tend to encourage the perception that winning is common. And they both build a “house advantage” into the system. If they didn’t, there’d be no financial reason for them to operate.
Nevertheless, both reasons are frequently offered as justifications for the rule (along with the more general principle of indemnity).
There is something to the idea that a stranger should not profit from another’s loss (as Spoons says). It explains the underwriting rule requiring insurable interest, but not the related rule that the insurable interest need only exist at the time the insurance is purchased. http://www.ins.state.ny.us/rg030717.htm
The insurance/gambling distinction is weakened by the same rule, which has been criticized on both of these grounds. And there is another problem with the gambling theory: We permit people to speculate about other things like stocks, options, derivatives, investments, commodity futures–why not insurance?
The moral hazard justification is harder to shake. Even if claims made by murderers are legally unenforceable, not every murderer will be caught. And in marginal cases, the murderer might not be charged or convicted. That means that the insurer will incur costs proving that it is not liable, and sometimes will be required to pay when it shouldn’t.
More fundamentally, there is a negative justification. Why should you be allowed to insure the life of a stranger or property in which you have no interest? Is there a good reason to do it? It sure looks suspicious, and the retort that one can contract for whatever one wants does not offer much solace.
At any rate, whether it is justified or not, it is the law and it is part of the life insurance underwriting practice. That was the OP’s question.
[QUOTE=CookingWithGas]
I thought I could buy life insurance on anyone I damn well please
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I believe the OP has been answered. Allow me to summarize: No you can’t. The reasons for the rule are a little controversial, but the rule itself is part of basic insurance law. Moreover, there is no good reason for you to be able to insure the life of a stranger. You need an insurable interest.