The Nephew, the Trust, and the Two-Year Flip

Insurable interest must exist at inception. The person taking out the policy must have a lawful economic interest in the continued life of the insured, and that interest must exist when the contract is formed. A trust created and funded by investors has no such relationship to Devon; it has an interest only in his death.

Red flags, all present:

• Applicant is a trust with no pre-existing relationship to the insured.
• Third party pays the premium.
• Cash paid to the insured at signing.
• A prearranged agreement to transfer the policy once the contestability period runs.
• Face amount ($3M) grossly disproportionate to verified net worth and income need.
• Insured is elderly and the arrangement is marketed as an investment.

Conclusion. This is classic STOLI. The economic benefit runs to investors, not to Devon or his heirs, and the policy is a wager on his death. The two-year waiting period is not a cure; it is evidence of the intent to sell.

Judgment point: The test is not what the trust document says about insurable interest - it is who put up the money and who bears the risk at the outset.

For the nephew. Submitting a knowingly false net worth and a false statement of purpose is a material misrepresentation to the insurer. That is an unfair trade practice, supports suspension or revocation of his license and civil penalties, and creates personal civil exposure to the insurer and to Devon. He also fails the basic suitability and "know your client" duty: he is three months licensed, cannot evaluate a $3M premium-financed arrangement, and is being used as the means of entry.

For the policy. It is void or voidable for lack of insurable interest from inception. The insurer can rescind and return premiums even within the contestability period, because lack of insurable interest goes to formation rather than to a misstatement in the application. A death claim would likely be denied and litigated.

For the insurer. If it issues and later pays a death benefit on a known STOLI arrangement, it faces regulatory action and reputational exposure; that is why underwriting scrutinizes third-party premium sources.

Judgment point: The nephew's defense that "the firm told me to" is not a defense - the producer signs the application and owns its contents.

Restructure so Devon is the applicant, owner, and premium payer. Devon applies for an amount supportable by his actual financials - likely well below $3M - and pays the premium from his own funds. He may name an irrevocable life insurance trust for his children as owner and beneficiary, and fund the trust's premium payments with annual gifts, but the interest being insured must be his own and no investor may hold the economics.

Remove the transfer agreement. There can be no prearranged sale of the policy to a third party, no fee to Devon for applying, and no premium financing from a stranger.

Disclose the trust arrangement honestly. The application should state the trust as owner/beneficiary, the source of premium dollars, and the real purpose - family protection and estate liquidity for his heirs - with a net worth figure that matches documentation.

Judgment point: The same trust structure is legitimate or abusive depending on three things: who funds it, who bears the risk, and whether a resale is contemplated at inception.