National Association of Estate Planners and Councils

September, 2006 Newsletter
Provided by Leimberg Information Services

See other issues.

Insurer Acts to Rescind Free Life Insurance

We've long predicted that so-called "Free" Life Insurance (also called stranger-owned life insurance, SOLI/ STOLI , Investor Initiated Life Insurance (IILI), or speculator initiated life insurance, SPIN) and sold in both recourse and nonrecourse versions would be problematic. (See Estate Planning Newsletters # 1007 , 914 , and 670). You can listen to my point of view in a special LISI PodCast entitled "Investor Initiated Life Insurance - Free Lunch or Acid Indigestion?" (Scroll down to it).

Congress is already doing a study on the charitable version of free insurance and has bipartisan legislation in the hopper that would impose a 100% excise tax on such transactions. (See Estate Planning Newsletter # 818).

LISI has just received the first of what we predict will be many signs of adverse reactions by insurers, regulators, and courts.


A major insurer, New York Life and Annuity Corporation, has served notice to the trustee of a trust holding life insurance that it intends to rescind a $1,000,000 policy on its insured's life.


The complaint, dated July 5, 2006, alleges that the policy was issued by the insurer in the belief that the trust was created at the insured's behest for the exclusive benefit of a person or persons having a familial or economic interest in the preservation of the insured's life.

It further alleges that it has since come to the attention of the insurer that it was instead created at the behest of an investor or investors who have no such familial or economic interest in the insured's continued life and that those non related investors are the beneficiaries and premium payors.

This, the insurer alleges, violates New York State's insurable interest law # 3205 – and is therefore voidable.

Because the insurer has no remedy "at law", it is electing to rescind the policy and return premiums (plus interest).

The insurer has stated that it considers it has no further liability under the contract.

It has asked for reimbursement of any costs associated with the recession – as well as any other relief the court thinks "just and equitable."


Now the insured has no coverage, is older, perhaps in worse health.

And what if the documents the insured signed required certain representations and warranties which the investor group now claims the insured has breeched?

The ugliness has begun – and there's a lot of it out there. And more than a little is sure to hit the proverbial fan!

Stay tuned to LISI!


Steve Leimberg


Steve Leimberg's Estate Planning Newsletter # 1013 (August 30, 2006) at Copyright 2006 Leimberg Information Services, Inc. (LISI). Reproduction in Any Form or Forwarding to Any Person Prohibited – Without Express Permission!


The rescission notice was served to Pinchus Menche as Trustee of the Deutsch Irrevocable Life Insurance Trust. The suit will take place in the Supreme Court of New York, County of New York.

You'll find more in LISI Estate Planning Newsletters 619, 671, and 676 , in Wendy Davis's "Death-Pool Donations" in the May 2004 issue of Trusts & Estates, Leimberg, Gibbons, and Nelson, TOLI, COLI, BOLI, and Insurable Interests, Estate Planning Magazine, Vol. 28, No. 1, July 2001, Pg. 333; Leimberg, "Stranger-Owned Life Insurance (SOLI): Killing the Goose that Lays Golden Eggs", Estate Planning, January 2005, Vol. 32, No. 1, Pg. 43; Leimberg, "Stranger-Owned Life Insurance (SOLI): Killing the Goose that Lays Golden Eggs", Tax Analysts/The Insurance Tax Review, Vol. 28, No. 5, May 2005; Jones, Leimberg, and Rybka, "'Free' Life Insurance: Risks and Costs of Non-Recourse Premium Financing, Estate Planning Journal, Vol. 33, No. 7, July 2006, Pg. 3.

All NAEPC-affiliated estate planning councils are eligible to receive a discounted subscription rate to the Leimberg LISI service. Please see more information about the offering. You may also contact your local council office / board member to find out whether they are offering the service as a member benefit.