Stranger-Originated Coverage, a Buy-Sell, and a Reluctant Insured

Decline to write it, and document why. Under N.Y. Ins. Law § 3205 a life policy procured on another person's life is lawful only where the purchaser has an insurable interest at inception. Insurable interest means a lawful economic interest arising from blood, marriage, or business relationship - an expectation of gain from the insured's death is the opposite of that.

The trust wrapper does not cure this. Every hallmark of stranger-originated life insurance is present:

• Investors with no relationship to Marcus fund the premiums.
• Marcus is recruited and paid ($75,000) to be the insured.
• The face amount is justified by his net worth, not by any loss to the owner.
• The structure is designed for resale or investor yield.

A policy built on a wager is void as against public policy, and a producer who submits one risks license suspension or revocation. The $75,000 is itself a red flag - it is an inducement for the use of a human life as an investment.

The constructive alternative: if Marcus truly wants estate liquidity, a legitimate ILIT funded by him, with an independent trustee and family beneficiaries, accomplishes the goal lawfully. The face amount should track a real projected estate tax or liquidity need.

Yes - a business insurable interest exists, but the amount and the paperwork must hold up.

• Amount. The company's insurable interest is the economic loss it would suffer. Marcus's 45% of a $9 million entity is roughly $4.05 million, so $4 million is defensible - but the number should be derived from the signed buy-sell agreement's valuation formula, not reverse-engineered to match the desired policy. If the agreement is unfunded or unpriced, fix it first.
• Consent. New York requires the insured's written consent to a policy on his life; a valid signature on the application plus the buy-sell consent serves that purpose.
• Notice and eligibility (IRC § 101(j)). Employer-owned life insurance proceeds are income-tax-free only if, before issuance, the employer gives written notice of the intent to insure and the maximum face amount, obtains written consent, and the insured is a highly compensated employee (or among the top 35% of employees). Miss this and the death benefit becomes ordinary income to the LLC.
• Structure. Decide entity-purchase versus cross-purchase. An entity purchase is simpler with four owners, but surviving owners get no step-up for the purchased interest; cross-purchase gives a step-up but requires four policies per owner. Model the income-tax result before choosing.

Nothing can be forced, and it should not be attempted. A policy on Dana's life requires her written consent and application; without them there is no insurable interest and no underwritable file. Submitting an application she did not sign, or procuring a policy and later assigning it to the LLC, would be a misrepresentation and would void the arrangement.

Workable paths, in order of preference:

1. Explain the purpose. Dana may not realize the coverage protects the LLC and funds the purchase of her interest, which benefits her estate. Consent often follows clarity.
2. Simplified or guaranteed-issue underwriting. A no-exam product with graded benefits in the first two years may be acceptable for a buy-sell backstop - but price the graded period and the higher face-amount cost against the $2 million target.
3. Reduce the face amount so it falls inside a simplified-issue limit.
4. Self-fund with a sinking fund or a funded buy-sell with installment terms.

Meanwhile, the LLC should not lapse into treating Dana's coverage as 'in process.' An unfunded buy-sell with a deceased owner's estate is a dispute, not a plan.