A former insurance producer, Laura understands that education is key when it comes to buying insurance. She has happily dedicated many hours to helping her clients understand how the insurance marketplace works so they can find the best car, home, and life insurance products for their needs.

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Dan Walker graduated with a BS in Administrative Management in 2005 and has been working in his family’s insurance agency, FCI Agency, for 15 years. He is licensed as an agent to write property and casualty insurance, including home, auto, umbrella, and dwelling fire insurance. He’s also been featured on sites like Reviews.com.

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Reviewed by Daniel Walker
Licensed Car Insurance Agent

UPDATED: Apr 9, 2020

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Don't miss these facts...

  • There has to be an insurable interest for any life insurance policy transaction to occur
  • There is insurable interest if a divorce if the ex-husband is paying alimony and child support If he should die, it will burden his ex-wife and children
  • In divorce situations, courts can require an ex-husband to purchase or maintain current life insurance in force to protect the family
  • In cases of divorce, the dependent ex-wife should solicit expert advice from an agent or broker to be sure that all of the details are arranged properly
  • Stranger life insurance, or STOLI, is where insurance is purchased on a stranger as an investment. Insurance regulators are looking into this as a shady practice.
  • A spouse of a deceased partner or stockholder in a small business is entitled by law to receive a portion of the value of the firm. It is best served to fund that transaction with life insurance


Who can buy life insurance on who? That may sound like somewhat of a silly question, but people just can’t go around buying life insurance on just about anyone that they want.

Just imagine that if it were legal, a surge of unknown insureds might break out.

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Insurable Interest

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In the insurance world, there are laws that state very clearly how life insurance can be purchased and upon whom it can be bought.

A very simple description of the insurable interest rule simply states that a beneficiary must have more to gain by the insured living, than by the insured dying.

The concept is very straightforward and has been used in the life insurance industry for years.

The classic case where the question of purchasing life insurance on a father of a child, would only realistically come up in a divorce or separation situation where the mother of a child would want protection from a financial standpoint if the father were to die.

The mother has the right to purchase such a policy, but only if the father agrees.

Once again, if it were allowed for life insurance to be purchased on someone without their knowledge, think of the mayhem that could result from such an act.

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The Job of The Life Insurance Agent and the Home Office Underwriter

It is the responsibility of the life agent or broker in the first place to be aware of possible cases of insurable interest violations.

In situations like the previous example, if an inordinate amount of life coverage is being sought, the agent should explain to the potential purchaser of the insurance why such a purchase might go wrong where the death benefit could be denied.

What kind of mischief would ensure, you might ask.

Just the fact that for some people it would be very tempting to buy a significant amount of life insurance on an individual, and then the new insured might meet an untimely death at the hands of the insurance buyer.

It happens anyway, from time to time where a spouse purchases a large policy with consent, and the insured is murdered out of sheer greed.

Of course, many people with the idea in mind of killing their spouse for the insurance money might just find some other agent or broker to sell the policy, but if the first agent does the right thing, life might be saved by the buyer of the insurance might change his mind altogether.

Stranger Life Insurance

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The aspect of over-insuring someone for the insurance money brings up another, a more recent tactic that is somewhat along those lines.

It is called “Stranger Life Insurance” or STOLI. Insurance regulatory agencies are beginning to take a hard look at the practice since it is a supposed investment.

However, this STOLI, or stranger originate life insurance if flirting with the same moral dilemma as we discussed in our earlier example.

The problem with STOLI, the same temptation can arise.

For example, when an elderly man is approached by his insurance agent who offers to buy a life insurance policy on the man and then pay the proceeds to a stranger investor, the insured might at first smell a rat.

The deal usually works with the initial beneficiary as being named the spouse of the insured, then at the end of two years, then the incontestable period is over, the elder gentleman who is the insured sells the policy to the investor.

In this case, there is no insurable interest present, and there is certainly the possibility of foul play, and it could put the elderly policyholder in danger.

Legal Situations Cause Life Insurance To Be Purchased

The purchase of life insurance on the father of a child is often required in divorce settlements. In this situation.

The court would require such a transaction as a part of the divorce settlement. In many instances, a divorced female with children will be in a worse situation financially if the father were to die, which would stop alimony and child support.

If a father is paying child support and alimony on a regular basis, there is an insurable interest.

The divorced wife and children would certainly be in far worse shape financially if the father died, so that is the purpose of life insurance.

This scenario is very common, and rightly so because life insurance protects children and families for just such a situation.

Another twist on the matter would be for the ex-wife in a divorce case to go ahead and take the policy out on the ex-husband herself.

She would be the owner and pay the premiums on the policy, and she would be the beneficiary as well. If the ex-husband is wishy-washy about making the insurance payments, then this would be a good solution.

A term life policy could be the policy type which would cut down on premium expenses.

It is important for the ex-wife to be the owner of the life insurance policy in any event because the owner is the only party who can change the beneficiary.

If the ex-husband is the owner, he would be able to change the beneficiary to a new wife or girlfriend, and the ex-wife would never know about it.

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How Things Can Get Confusing in a Divorce Case Where Life Insurance is Involved

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If recent divorce court cases of the wealthy and well-heeled are any model, we can learn how twisted things can become.

Warren Hillman was a government worker who had risen to a very high level, as an advisor in the Department of Management and budget, just under David Stockman.

Hillman had a life insurance policy purchased while he worked for the government for $124,558. His ex-wife, who he had divorced ten years before his death was the beneficiary of the policy.

Hillman had since remarried, and the couple lived in Virginia. Hillman’s first wife was still the beneficiary on the policy, as Hillman had neglected to change the beneficiary.

Hillman’s second wife claimed the proceeds of the policy since Virginia law awards policy death benefits to the current widow.

The case went to the United States Supreme Court where it was ruled by Justice Sonya Sotomayer that since the policy was purchased while he was still married to the first wife, and that the beneficiary was still the first wife, the proceeds were to go to her, and that is how it ended.

Tips to Remember When Purchasing Life Insurance on an Ex-Spouse

  • The ex-wife should consult a broker or agent and receive advice on how much life insurance is needed to be able to present to the court, assuming the ex-husband will be paying for the insurance.
  • If the court does not force the ex-husband to purchase a policy, the ex-wife should get the agreement of the ex-husband and purchase a policy herself. Most men will go along with that because it will be benefitting the children.
  • The ex-wife should also set up a will with a living trust, and she should also purchase life insurance to benefit the children. A guardian should be appointed to raise the children with the insurance money if the ex-wife should die.
  • The ex-wife should periodically, at least once per year, review the life insurance program on her ex-husband and herself to be sure that the amount of coverage is keeping pace with inflation and other family needs.

Business Settlements Can Enter Into The Picture

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Settling the affairs of a deceased partner in a business can be a real troubling event, especially if the deceased owner had a wife and children.

Legally, when a partner dies, the partnership is dissolved upon the death, which may leave a wife and children out in the cold.

There may be life insurance already that had covered the dead partner, but most likely it was personal life insurance.

The problem is that the dead partner’s share of the business had value. Since he is now dead, he can no longer create any income.

In all partnerships, a buy and sell agreement should be put into place, and it should be funded with life insurance.

This way, if a partner should die, the value of the partner share of the deceased is paid to the widow, and the remaining partner or partners own the full value of the business.

There are instances where the spouse of a deceased partner or shareholder if the business is incorporated, has had to bring a lawsuit against the business to claim her deceased husband’s share of the business.

This can be done, but if the business is not a going concern, it is not likely that she would be paid anything. With a buy-sell agreement that is funded with life insurance, it is a simple trade.

The wife trades her share of the business, which she inherited, for the money from the life insurance proceeds.

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In Conclusion

It is fitting and proper for a divorced wife to ask her ex-husband to purchase or maintain current life insurance for the protection of herself and their children financially.

Insurable interest must be present, in that there needs to be a financial interest or dependency.

Life insurance companies are very careful about the relationships of people, and “Stranger Owned Life Insurance” schemes are being looked at careful by insurance regulators.

Stranger-owned life insurance schemes do flaunt the principle of insurable interest, and these types of operations are exactly why the insurable interest clause was established.

Business partnerships and close corporations need to be aware of buyout needs if partners or shareholders die. A funded buy-sell agreement is the best method of legally and practically solving that situation.

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