OGC Opinion No. 08-05-02

The Office of General Counsel issued the following opinion on May 6, 2008 representing the position of the New York State Insurance Department.

RE: Insurable Interest Requirement (Life Insurance)

Question Presented:

Would the issuance of a policy of life insurance in the below-described proposed transaction be consonant with the insurable interest requirements of N. Y. Ins. Law § 3205 (McKinney 2007)?


Yes. Assuming that all of the pertinent facts are as described, a policy of life insurance issued in connection with the proposed transaction described below would not violate the insurable interest requirements of Insurance Law § 3205.


The counsel to a retired individual (the “Insured”) who wishes to engage in a transaction (the “Plan”), the relevant facts of which are as follows:

1. The Insured desires to direct his self-directed Individual Retirement Account (“IRA”) to make an investment in the form of a promissory note (“Note”) to a non-profit corporation (“Charity”).

2. The Note provides for interest only payments until the principal amount of the Note is due, the earlier of 20 years or the Insured’s date of death.

3. To insure the ultimate repayment of the principal amount of the Note, the Insured and Charity desire to have the Charity apply for an insurance policy (“Policy”) on the Insured’s life in an amount equal to the face amount of the Note. The Insured has a good faith intention to obtain insurance for the benefit of their Charity.

4. The Insured is of lawful age and an active contributor to the Charity. The Insured has a demonstrated history of providing either substantial contributions or service to the Charity. The Charity has an inherent interest in the continued longevity of the Insured as a result of such contributions.

5. The Charity will be the sole owner and beneficiary of the Policy. The Charity plans to maintain the Policy until the death of the Insured.

6. The Policy will provide that the death benefits will be collaterally assigned to the IRA to the extent of any outstanding balance on the Note upon the Insured’s date of death.

7. The premiums are paid by the Charity from the proceeds of the loan evidenced by the Note.

8. Neither the Insured nor Charity have any intention to use the policy for any type of viatical settlement, senior life settlement or for any other secondary market.

9. There are no third-party financiers or investors related to the Policy.

10. There is no assignment of the ownership of the Policy contemplated under the Plan.

11. The beneficiary of the IRA is the Insured’s family or the Charity.


The Plan is a method of utilizing an individual’s self-directed IRA to provide funding to a charity without adverse income tax consequences. A key element of the Plan is the purchase of a life insurance policy by and for the benefit of a charity.1

Insurance Law § 3205 is germane to this inquiry. That statute defines “insurable interest,” and sets forth the standards for determining where an insurable interest exists. The statute provides, in relevant part, as follows:

(a) In this section:

(1) The term, "insurable interest" means:

(A) in the case of persons closely related by blood or by law, a substantial interest engendered by love and affection;
(B) in the case of other persons, a lawful and substantial economic interest in the continued life, health or bodily safety of the person insured, as distinguished from an interest which would arise only by, or would be enhanced in value by, the death, disablement or injury of the insured.

* * * *

(b) (1) Any person of lawful age may on his own initiative procure or effect a contract of insurance upon his own person for the benefit of any person, firm, association or corporation. Nothing herein shall be deemed to prohibit the immediate transfer or assignment of a contract so procured or effectuated.

(2) No person shall procure or cause to be procured, directly or by assignment or otherwise any contract of insurance upon the person of another unless the benefits under such contract are payable to the person insured or his personal representatives, or to a person having, at the time when such contract is made, an insurable interest in the person insured.

(3) Notwithstanding the provisions of paragraphs one and two of this subsection, a Type B charitable, educational or religious corporation formed pursuant to paragraph (b) of section two hundred one of the not-for-profit corporation law, or its agent, may procure or cause to be procured, directly or by assignment or otherwise, a contract of life insurance upon the person of another and may designate itself or cause to have itself designated as the beneficiary of such contract.

* * * *

Insurance Law § 3205(b)(3) represents an expansion of the class of parties that have an insurable interest in the life of the insured. That paragraph was enacted pursuant to the Laws of 1996, chapter 510, and amended (to eliminate the five year “sunset” provision of the original) by the Laws of 2001, chapter 146. The purpose of the provision is noted in the following excerpt from a letter dated July 1, 1996, from the Superintendent of Insurance to the Governor’s Counsel:

The [New York State Senate] memorandum in support of the bill states that the ability of charities to be able to procure life insurance policies on their behalf offers a new method of fund raising for these organizations. It appears that the intent of the bill is to permit donors to enter into long term gift giving arrangements which result in posthumous endowments to the religious charitable and educational organizations.

In essence, the bill confers these charitable, religious and educational corporations with an insurable interest in the lives of their donors. This would expand the definition of insurable interest and presumably permit these organizations to solicit potential donors to enter into long term gift giving programs.

The current law permits donors by assignment of an existing life insurance policy to enter into long term gift giving arrangements resulting in posthumous endowments. Section 3205(b)(1) was amended by Chapter 334 of the laws of 1991 to proclaim the public policy of this state that an individual may voluntarily insure his or her life for the benefit of any person, firm, association or corporation and that the individual may immediately assign or transfer the contract to any other entity. … The bill would permit a direct solicitation by department licensees. Thus, a licensed insurance agent can assist in the procurement of a new life insurance policy on the life of a donor, and the charitable organization would be the policyowner and beneficiary.

Based on the above discussion, the Department recommends approval of the bill.

1995-1996 NYS Insurance Department Legislative Diary, Volume 5, Page 103.

The above-described amendment to Section 3205(b) imbues charitable organizations with an insurable interest in the lives of their donors. As a practical matter, it was enacted to better enable charitable organizations to obtain life insurance policies on the lives of their donors, in that it allows for the direct solicitation of charitable organizations by licensees of the Department, and thus eliminates, in the charitable donation context, the intervening step of requiring a donor to first purchase the policy and then transfer the policy to the organization.

In the transaction proposed, the Charity will be purchasing a policy on the life of the Insured. The premiums for the policy will be paid using a portion of the proceeds of the loan evidenced by the Note issued to the Insured’s self-directed IRA. The Charity will be the named beneficiary of the policy, and the Insured’s IRA will have a security interest in the policy proceeds in order to secure repayment of the Note. Upon the death of the Insured prior to the end of the 20 years, the death benefit will be paid to the Charity, and the Charity would apply the proceeds to the repayment of the principal balance remaining outstanding on the Note. Any amounts in excess of the principal balance will be retained by the Charity.

This is not the first time that the Department has been asked for its opinion regarding a novel application of the rule set forth in Insurance Law § 3205(b)(3). In OGC Opinion No. 03-07-39 (July 7, 2003), the Department considered a proposal to raise funds through a securitization arrangement, with the proceeds therefrom to be used to purchase life insurance and annuity contracts on a pool of at least 100 individual donors. In that arrangement, the annuity income and proceeds from the maturing life policies were to be first applied to the debt service on the securities, and only a small percentage of the value of any policy purchased with respect to a donor would ever be realized by a charitable beneficiary. The Department concluded that the proposed arrangement was not consistent with the purpose of Insurance Law § 3205(b)(3) chiefly because the transaction seemed structured more for the benefit of third-party investors than for the ostensible charitable beneficiary.

Here, by contrast, the Plan differs significantly from that prior proposal in that there are no unrelated third parties who stand to reap the vast majority of the benefits of the insurance procured. In addition, the Plan does not involve or contemplate a life settlement or other prearranged assignment of the policy as a means of evading the Insurance Law’s insurable interest requirement. Accordingly, assuming that all of the pertinent facts are as described, a policy of life insurance issued in connection with the Plan would not violate the insurable interest requirements of Insurance Law § 3205.

Please note that the conclusion herein does not preclude the Department from finding, in the event that different or additional facts apply, that the insurable interest requirement of Insurance Law § 3205 may not be satisfied by a purportedly similar transaction.

For further information you may contact Supervising Attorney Michael Campanelli at the New York City office.

1 The proposed transaction was addressed by the Internal Revenue Service (“IRS”) in Private Letter Ruling 200741016 (October 5, 2007). In that Letter Ruling, the IRS concluded that the proposed transaction was not a “prohibited transaction” within the meaning of Internal Revenue Code (“I.R.C.”) § 4975, and that the transaction does not constitute a prohibited investment in insurance within the meaning of I.R.C. § 408(a)(3).