What is Zero Premium Life Insurance?
Zero premium life insurance is meant to be marketed to seniors, probably between 65 and 85 years old. It is a permanent life insurance product, probably universal life, with a face value of $ 50,000. Investors will pay the premiums in return for a signed agreement from the insured. The agreement will specify that upon the insured's death, the investors will get $ 35,000 of the death benefit, but give the insured's beneficiaries $ 15,000.
So, essentially, the insured person would have a free final expense product, with enough face value to pay for a funeral and settle debts. Final expense insurance is a hot market for seniors, who become concerned about leaving their spouses or children with the cost of an expensive funeral. The senior citizen may also want to leave their spouse or children some money to settle debts, pay off a car, etc.
So why is Free Life Insurance Bad?
Well it sounds great. As an insurance agent, I would love to visit with senior citizens, especially those on fixed incomes, and offer them free life insurance! It would also be great to get paid for doing it! This sounds like a dream come true. Who wouldn't want a chance to be a hero, and to make money at the same time?
However, we have a very large problem. Every insurance agent learns that beneficiaries must have an "insurable interest" in the insured person's life. In other words, spouses, children, or siblings who may have to pay for funerals or settle debts have a clear insurable interest. Dependants, who will have to do without income, would have a clear insurable interest. Business partners and employers, who would have to do without the insured person's expertise, have a clear insurable interest.
However, strangers on the street do not have an insurable interest. It is illegal to gamble on people lives, or to have an interest in a person's death! Of course it is. As attractive as free life insurance may seem, the value is offset by the ethical and legal problems with the product.
I cannot imagine that insurance companies would be any happier with a product that is paid for by third party investors. In a perfect world for life insurance underwriters, we would all live until 110, and have plenty of time to pay up our insurance policies and give the insurance company time to profit from our money! Investors will look for insurance products that they think are "underpriced", and this will affect how profitable an insurance company can be.
Is Zero Premium Life Insurance Legal?
As of this writing, no state insurance department has approved zero premium life insurance, but plenty of aggressive recruiters are convinced that it will be. I would not be so optimistic. It seems to fail the very basic test of having beneficiaries with an insurable interest.