One enterprising 69-year-old seller asked $498,900 for his rural Wisconsin home but offered a special bonus payoff.

The buyer of that house would also become the beneficiary of a 10-year term life insurance policy paying $500,000 in proceeds should the senior die during the next decade.

Elder entrepreneur Bob Fanning reported to the Minneapolis Star Tribune that both parents and his sister died before age 79, the policy cutoff age.

This innovative sales technique appears to have worked – at least for the crafty Fanning.

Risks of Buying Life-Insured Real Estate
As admirable as this creative solution to crumbling real estate prices is, prospective buyers should seriously consider several drawbacks and risks.

First, the premiums to insure someone in Fanning’s age bracket for $500,000 in coverage will be at least $10,000 annually. The buyer would have to be sure that a legal agreement was in effect that guaranteed the seller would pay premiums for the full 10-year term.

Second, younger sellers would probably experience strong resistance to such a sales tactic. Very few buyers would be enticed by an insurance policy from which there was little chance that they would ever collect.

Third, financial pressures might induce a desperate new home owner to consider murdering the insured policyholder - especially near the end of the 10-year period of insurance. Fanning’s lawyer has written specific exclusions for murder and suicide into his life insurance agreement with the new buyer.

Paying lawyers to craft customized provisions into special legal agreements is very expensive. Besides, paper agreements don't always stop desperate people from committing dire acts.

Insurable Interest or Sales Gimmick?
Finally, I doubt that state compliance authorities in many jurisdictions would ever agree to underwrite any policy that was a key component of a real estate transaction.

It’s Life Insurance 101 that a valid insurance contract requires an insurable interest. An insurable interest only exists if beneficiary would suffer a financial loss when an insured event occurs. Admittedly, some life insurers and regulatory authorities are stricter than others in interpreting the laws that define insurable interest.

That’s not to say that you won’t find an insurer willing to underwrite life insurance policies linked to real estate deals. But you can be sure that a team of insurance company lawyers will use the legal language in those same policies to fight to the death from having to pay any death claims.

The same financial pressures arising from the Great Recession that make life insurance proceeds attractive real estate sales incentives also render the concept uninsurable in practice.

See also Selling your life insurance policy for cash.