Question

Fund Life & Health insurance

How does the law of insurable interest protect human life? (identifying the requirement of the law and insurance company and analyzing how it protects general public.)

What factors make joint life an effective tool in the case of a buy-sell agreement? ( Explain how JL matches the need for buy-sell agreement timing and analyzing what riders in JL benefits in the situation of buy-sell agreement.)

Answer 1

How does the law of insurable interest protect human life?

Insurable interest refers to the right of property to be insured. It may also mean the interest of a beneficiary of a life insurance policy to prove need for the proceeds, called the "insurable interest doctrine".

When an insured person derives a financial or other kind of benefit from the continuous existence, without repair or damage, of the insured object (or in the case of a person, their continued survival). A person has an insurable interest in something when loss of or damage to that thing would cause the person to suffer a financial or other kind of loss. Normally, insurable interest is established by ownership, possession, or direct relationship. For example, people have insurable interests in their own homes and vehicles, but not in their neighbour’s homes and vehicles, and almost certainly not those of strangers.

The "factual expectancy test" and "legal interest test" are the two major concepts of insurable interest.

The insurable interest requirement in life insurance coverage disputes in lights of the present needs of contemporary American Society, including analysis of:

1) Legal interpretation and underlying public policy rationales supporting such an insurable interest,

2) Who is legally entitled to an insurable interest in the life of another,

3) When an insurable interest must an exist,

4) When an insurable interest is or should be extinguished,

5) Who may challenge the lack of an insurable interest,

6) Whether an insurable interest is life insurance is subject to waiver or estoppel defences,

7) Whether or not an applicant for life insurance should be informed of this insurable interest requirement.

Insurable interest specifically applies to people or entities where there is a reasonable assumption of longevity or sustainability, barring any unforeseen adverse events. Insurable interest insures against the prospect of a loss to this person or entity. For example, a corporation may have an insurable interest in the chief executive officer (CEO), and an American football team may have an insurable interest in a star, franchise quarterback. Further, a business may have an insurable interest in its c-suite officers but not its average employees.

What factors make joint life an effective tool in the case of a buy-sell agreement?

Below are the three most relevant buy-sell agreements when it’s time for an owner to give up his or her stake in a company.

1. Cross Purchase Agreement: This structure is for two or more parties and is utilized during ownership changes when shares are crossed over to other owners.

2. Stock Redemption Agreement: In this structure, the entity, or the business, is the focal point and if shares are exchanged, the entity will repurchase them. This structure gives owner(s) peace of mind that they can sell shares back to the entity, if needed.

3. Combination Agreement: This structure gives owners the option to do either of the above, meaning they can sell their stake to either the entity or to other owner(s). The structure of the combination agreement will determine the right of first refusal between owner and equity. This strategy provides tremendous flexibility to both sell and purchase additional shares, and is commonly used to ensure shares remain with the original owners.

Riders in JL benefits in the situation of buy-sell agreement. They are:

• The owner’s spouse or estate agrees, in the event of the owner’s death, to sell the entire interest in the business to the employee (who is often a family member).

• The employee agrees to purchase the business subject to the terms and conditions of the agreement, using the funding provided by the life insurance, whether it is triggered by death, disability (the rider) or retirement (the policy’s cash value).

• The owner agrees that he or she will not sell, assign, convey, encumber or otherwise dispose of the business or of any asset of business, except as allowed in the agreement.

• If the owner decides to dispose of the business during his or her lifetime, the employee has the right of first refusal.