Delaware Supreme Court Clarifies State Law Regarding Life Settlements

The Delaware Supreme Court recently ruled on the validity of insurance policies allegedly purchased for investment purposes rather than insurance purposes.  The decision conflicts with a prior decision in New York, but is generally consistent with New York State insurance legislation subsequent to that inconsistent New York decision.  In addition to the longevity risk that historically has created both risk and opportunity in the life settlements market, regulatory risk in this area is becoming increasingly pronounced.  The SEC has focused on accounting practices on the part of at least one life settlements intermediary, and the courts have entertained challenges to the validity of policies purchased by life settlement investors.  This article is intended to assist hedge funds that invest in life settlements in appreciating the precarious and uneven legal environment in which they operate.  See also “In Blow to Opponents of ‘Stranger-Owned Life Insurance,’ New York’s High Court Rules that New York Law Did Not Prohibit a Person from Purchasing a Life Insurance Policy and Immediately Transferring that Policy to an Individual Who Does Not Have a Traditional Insurable Interest in the Purchaser’s Life,” Hedge Fund Law Report, Vol. 3, No. 39 (Dec. 17, 2010).

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