Raby & Raby on Life Insurance Without an "Insurable Interest"

Burgess J.W. Raby & William L. Raby have published Life Insurance Without an "Insurable Interest", also available on the Tax Analysts web site as Doc 2005-11521, 2005 TNT 101-91.  Here is part of the Conclusion:

Regulation of the life insurance business is primarily a matter of state law, and the determination of whether A has an insurable interest in B is also a matter of state law. Federal courts do get involved however, either because of diversity of citizenship, as in Tillman, or because of federal tax issues, as in Winn- Dixie and several other COLI cases. The tax law gets modified from time to time in the process, to prevent what Congress views as abuses of provisions that are being used in ways it concludes (with hindsight) were never intended. Life insurance, however, is apt to be a staging ground for tax avoidance schemes so long as the tax law continues to exclude most life insurance proceeds paid by reason of death from income while allowing borrowing against life policies without tax consequences, even when the loans exceed the tax basis of the policies. The imperfections of actuarial tables and other actuarial assumptions will mean that from time to time promoters will view some types of policies as underpriced. Those then become fertile ground for pools of capital that will take advantage of that underpricing, as has existed recently with no-lapse guarantee universal life products. For example, policy pricing has assumptions about policies that are allowed to lapse. Those assume individual decisions by individual insureds. Those assumptions lower the premium cost but are invalid to when pools of capital are being invested in large numbers of policies that are being managed as a unit.