Life insurance on others for investment?

Question

What I know is that there are companies and individual investors that make money by buying life insurance on people without them knowing it. I know of a CPA that does and I have overheard discussions. These investors find people with "high risk" lives or jobs (tower climbers, high-rise construction workers, miners, etc.) and collect lists of names and info. Then they buy insurance on people without them knowing it, calculating that at least a few will die soon.

How is this done? I even recall reading a news article years ago about companies that did this. There was a company that got into trouble because they were buying insurance on their own "high risk" employees without them knowing it. But I remember that all the articles said it was only illegal because they were their employer. Other anonymous people could do it on you without being illegal.

I haven't been able to find anything on the Web. How do you go about buying insurance like this?

Answer 1

You can't just randomly buy insurance on strangers without their knowledge.

If someone has an existing life insurance policy, you can buy rights to the payoff -- this is known as the viatical industry.  It can make sense for some people; for example, for an extremely sick person who needs money for living or health care expenses more than their beneficiary needs money later.   But notice that this is *with* their knowledge and assent.

You can also make a contract with them that gives them money to buy the insurance in the first place.  This is known as 'Stranger-owned life insurance'.  But again, it is with their knowledge and consent.

State laws vary about what types of arrangements are legal, but I am not aware of any that allow you to buy life insurance on strangers without their knowledge or consent.

http://www.rmi.gsu.edu/rmi/faculty/klein...

http://taxprof.typepad.com/taxprof_blog/...

P.S. The work-related life insurance topic you may have encountered is also called 'janitor insurance'.   It is not necessarily illegal -- see http://en.wikipedia.org/wiki/Janitor_ins...

Answer 2

You can sell your own policy to an investor and then it may be resold to other investors.  Companies and individuals are not allowed to initiate life insurance on complete strangers.   Usually the insured has to participate in the underwriting process and sign the application.  If they were somehow putting these policies in force it would be by fraudulent means and they would spend a lot of time in prison if they ever got caught.  

Companies are allowed to purchase life insurance on their employees.  A lot of times the policies are used to fund company retirement benefits and protect companies from the deaths of key executives.  There are examples where companies have taken advantage of this privilege to try to profit off of the deaths of their employees, but most companies usually have legitimate reasons for entering these arrangements.