I'm really interested in the legal aspects of premium financed life insurance, partly because I'm a geeky estate planning lawyer, and partly because I think that in certain circumstances, these insurance policies can have positive estate planning implications for wealthy clients who do not have the cash flow (or are simply not willing) to pay life insurance premiums. Obviously, life insurance in an irrevocable life insurance trust ("ILIT") is exempt from the client's taxable estate, and can be used to pay estate taxes or as part of a zero-tax estate plan, with the client's taxable estate going to charity.
One argument against premium finance arrangements has always been that the implied arrangement to sell some of these policies after the statutory 2 year non-contestability period makes all premium financed arrangements void from their inception. This is because all states require an insurable interest when a policy is issued. This means that the policy must be purchased by someone who has an incentive to see the insured continue living. The argument is that while the insured or an ILIT is purchasing the policy, they are really doing so as a straw-person for a third party, who plans on purchasing the policy from the insured in after the 2 year incontestability period is complete.
However, a new case out of Minnesota (where most premium financed policies are issued) seems to state that unless there is a purchaser identifiable when the policy is purchased, there is no implied arrangement to sell the policy after 2 years. Here's a link to the case:
http://www.insurereinsure.com/files/upload/Order_Granting_Motion_to_Dismiss-Paulson_2.pdf
Unfortunately, the court does not explore the issue of what if the economic terms of the loan arrangement make it economically unfeasible to continue the policy after the 2 year period. I guess this issue is for another case, but for the time being, this seems to be a win for the premium finance industry.
