California crackdown on 'stranger-originated' life insurance becomes law

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As of Jan. 1, it will be illegal for investors, brokers and certain senior citizens to engage in a transaction known as "stranger-originated" life insurance.

The practice involves a person, usually older than 70 years of age, buying a large life insurance policy, often with borrowed money, with the understanding that the policy will be sold to investors after a two-year period when it becomes harder for insurers to claim fraud has occurred.

In exchange the senior citizen receives a substantial fee, and the investors continue to pay the policy premiums until they can collect the death benefit.

Such a scheme is "a wager on human life and violates the most basic principle of life insurance," said Brad Wenger, president of the Assn. of California Life and Health Insurance policies.

The new law regulates but does not prohibit the sale and resale of people's existing life insurance policies.