The policy provision pertaining to assignment almost invariably contains a statement that the company is not be responsible for the validity of any assignment of the policy. Some policies broaden the statement to include the word effect as well as validity. This provision is intended to protect the company against suits by a beneficiary or some other person alleging that the assignment was invalid because of the insured�s incompetence or because the assignment was tainted with fraud or executed under duress. In the leading case, an insured and his wife, who was the beneficiary of the policy, executed an assignment at a time when both were of advanced age and lacking in mental capacity. Upon the death of the insured, the company, having no knowledge of the incompetence of the insured and beneficiary, paid the proceeds to the assignee. Subsequently, the wife�s guardian sued the company to recover the proceeds on the ground that the assignment was void. The court refused to hold the company liable for a second payment of the proceeds, giving as one of its reasons the exculpatory statement in the assignment provision. The court noted, however, that this clause protects the company only when it has no knowledge of a defect in the assignment instrument or of any irregularity in the circumstances surrounding the assignment.

The right of an owner to assign the policy to anyone of his or her choice, whether or not such person has an insurable interest in the life of the insured, is recognized in all jurisdictions when no financial consideration is involved. Such donee-assignees have been regarded to be in the same class as donee-beneficiaries as far as insurable interest is concerned. The position of the courts is that it is immaterial whether the insured designates the payee of the policy within the contract itself (a conventional beneficiary designation) or by means of a separate instrument (an assignment). If the applicant for insurance has an insurable interest in the life of the insured at the inception of the contract, an insurable interest on the part of the assignee is not required, either at the inception of the contract or at the time of the insured�s death. Of course, if the insured were induced by the assignee to take out the policy, the assignee would have to have an insurable interest since in effect the assignee would be the applicant.

The situation is different when an assignment is made for a consideration. If the policy is assigned to a creditor as security for a debt, the assignee is permitted to retain only the amount of his or her interest, even though the assignment was absolute in form. Thus a creditor-assignee must have an insurable interest in the life of the insured at the maturity of the contract. If the creditor-assignee�s interest is extinguished prior to maturity of the policy, the assignment terminates. While it is clear that a creditor has an insurable interest in the life of his or her debtor, the amount is not limited to the amount of the debt, and there is no clear rule as to how much more than the debt is acceptable public policy.

On the other hand, an assignment to a purchaser for value is valid in the federal courts and in all but four states, regardless of the question of insurable interest. In other words, in most jurisdictions a policy can be sold to a person who has no insurable interest in the life of the insured. In 1911 Mr. Justice Holmes explained the rationale of this doctrine:

Briefly, the argument is that there should be a free market for life insurance policies when a person in poor health can obtain the true value of his or her policy. The minimum price at which a policy should sell is the cash value, but the real value of a policy on the life of a person in poor health is somewhere between the cash value and the face amount of the policy, depending on the individual�s chances of survival. If a person is ill and needs money for medical treatment, it is argued, he or she should be permitted to sell his or her policy to the highest bidder, without regard to insurable interest. The chances of murder are thought to be remote; in any case, the danger is probably not greater than when the insured designates a beneficiary who has no insurable interest.

Four states�Alabama, Kansas, Kentucky, and Pennsylvania�do not follow the majority rule. These states require the assignee to have an insurable interest when the policy is assigned for value. In these states such an assignment is permitted only up to an amount equal to the value paid by the assignee.