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Doesn't anyone understand insurable interest anymore?


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I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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Seems difficult to apply that concept to retirees.

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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I can't recall exactly how they did it. But I vaguely seem to recall it was sometimes done partly by piggybacking off existing benefit obligations. So if the company had previously committed itself to any death-related benefits for employees and was funding them on a pay as you go basis, then it might use that pre-existing obligation as a legal basis for claiming insurable interest and purchasing life insurance. That could apply to either current or retired employees. And in fact, it might be that in some states the insurable interest is only required at the time the policy is purchased? So if there is high turnover, the company can have insurance policies on employees who are no longer employed and aren't entitled to death benefits? The bottom line is that I think that there were some loopholes that hadn't been closed at the time the policies were being marketed.

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I think most states require an insurable interest at the time at policy is issued, without any conditions later.

However, it appears in the original link above that the Texas system is considering purchasing life insurance on retirees, without regard to whether they are insuring a death benefit or any other insurable interest.

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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Since this case involves Texas teachers, I thought it might be helpful for this dicussion to look at the applicable provisions of Texas law.

Chapter 1103 of the Texas Insurance Code in this area is a bit "circular." It says that whoever is named as beneficiary has an insurable interest in the life insured. And, the person applying for the insurance may name whoever they wish as beneficiary. So, if A applies for a policy and names B as beneficiary, B automatically has an insurable interest in A.

Another relevant point: A third party can apply for insurance on another person's life. However, that person has to approve of the transaction. So, in order for the plan to work, the retirees would have to approve the purchase of life insurance on their lives.

I guess my fundamental question is whether the plan would work in actuality. It seems to me that for it to be beneficial to the retirement system, the mortality of the insured retirees would have to be worse than that assumed in the pricing of the policies. That, and the net investment earnings would have to be better than the retirement system could earn. With such a large number of prospective insureds, it would seem that the state could "self insure" such a program which would out perform a purchase from a for profit insurance company. But, I'm not an actuary. Would appreciate any comments from those who are.

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I'm a pension actuary, not life insurance. Broadly speaking, your summary is valid.

Putting aside the question of insurable interest (which is not trivial), the ability of the Texas system to "profit" from large numbers of life insurance policies is suspect. More likely, the profit will belong to whoever gets a commission. Or the underwriting will be "questionable." Be carfeul who you take advice from.

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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