Can I Buy Life Insurance on a Stranger?

Not unless you have “insurable interest.’

The accused: Olga Rutterschmidt (left) and Helen Golay

A California jury is debating the fate of two elderly women accused of befriending a pair of homeless men, taking out millions of dollars in life insurance on them, and then killing them. Prosecutors charge that the women collected nearly $3 million from the insurance policies and were seeking to collect more when they were arrested. Murder aside, are you allowed to buy life insurance for someone else and then hope they die?

Not if he’s a stranger. A federal law enacted in 1945 leaves the regulation of the insurance industry to state governments, so the rules vary from place to place. In most cases, the owner of a policy * has to demonstrate that he or she is dependent in some way on the person whose life is being insured. This is known in the business as the “insurable interest” doctrine and has origins in common-law practice. In California, the rule is written outin the official books and grants insurable interest between a policy owner and “any person on whom he depends wholly or in part for education or support,” as well as other relationships involving a financial stake, like if the insured person owes the policy owner money.

The two California women currently on trial are alleged to have claimed some relationship to the two homeless men; one is said to have posed as a relative when she claimed a body. A federal grand jury originally charged the pair with attempts to defraud insurance companies, but that case was dismissed when the state initiated murder charges.

The insurable-interest doctrine originates from similarly devious schemes in England in the mid-18th century. When the British Parliament passed the Life Assurance Act in 1774, it acknowledged that the opportunity to insure a stranger would create a “mischievous kind of gaming” that allowed one person to profit from the death of another.

The scheme ascribed to the ladies in California is far from original. A 2002 article in the Nevada Law Journal recalls a 1954 case in which a man named Henry Lakin hired a transient World War II veteran named W. Harvey Hankinson to do odd business jobs and then quickly established him as a business partner. Lakin took out a life insurance policy on Hankinson and then brought him on a hunting trip to Pleasant Hill, Mo., from which only Lakin came back alive. There wasn’t enough evidence to prove that Hankinson had been murdered, but the insurance company was able to invoke the insurable-interest doctrine and void the policy.

Most cases of fraud are not as clear-cut. Many insurance companies and senior-rights groups are concerned about “stranger oriented” or “stranger owned” life insurance, in which investors approach an elderly person and offer him cash or other incentives to sign up for a plan. In return, he agrees to transfer the plan over to the investors after a two-year delay, which is enough time to skirt industry regulations. It’s not clear whether this scheme is legal, since the elderly are, in fact, taking out life insurance on themselves—which doesn’t run afoul of the insurable-interest rules.

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Explainer thanks the California Department of Insurance, Robert Jerry of the University of Florida Levin College of Law, Susan Nolan and Mike Humphreys of the National Conference of Insurance Legislators, and life-insurance consultant Anthony Steuer.

Correction, April 22, 2008:This article originally stated that beneficiaries of a life insurance policy must be dependent on the person whose life is insured. It is the owner of the policy who must be dependent on the insured person. (Return to the corrected sentence.)