If you convert a term life insurance policy into a permanent one, does that then become an entirely new policy, or is it a continuation of the existing one?
That is a question that the Ninth Circuit and the Southern District of New York in the U.S. have grappled with recently in two different cases relating to the topic of insurable interest and the news for the life settlement market is bittersweet.
Starting with the not-so-good news: because of the ruling from the United States Court of Appeals for the Ninth Circuit in Ameritas Life Insurance Corp v Wilmington Trust, N.A. (Moghadam), a life insurance policy that changes from a term one to a permanent one results in a new contract in the Ninth Circuit, which means that an investor that purchased the policy and activated the conversion does not have an insurable interest in the insured, thus rendering the new permanent policy void ab initio – i.e., it never existed in the first place.
In 2004, Ameritas issued a term life insurance policy on the life of Amir Moghadam which contained a conversion privilege, allowing the policyholder to convert the term policy into a permanent life insurance policy. The contractual language specified that a conversion would create “a new single life policy” with an updated premium rate and policy date.
Moghadam’s term policy was sold on the secondary market to Wilmington Trust which exercised the conversion privilege. Ameritas complied and issued the permanent policy to Wilmington but later filed a declaratory judgment in the Central District of California, alleging that the permanent policy was void for lack of an insurable interest.
The district court dismissed the complaint, concluding that the permanent policy was a “continuation” of the term policy and therefore did not require a new insurable interest at the time of conversion. Ameritas appealed and the court of appeals for the Ninth Circuit reversed the district court’s decision.
“We agree with our dissenting colleague that the conversion privilege formed part of the ‘benefit’ of Moghadam’s ‘original bargain’ when entering the Term Policy. But it does not follow that we must regard the Term Policy and the Permanent Policy as one and the same to protect that benefit. Nothing prevented Moghadam from exercising the conversion privilege himself, thereby realizing this benefit, for he had an insurable interest in his own life. Cal. Ins. Code §10110.1(b). As we explain below, the problem is that Wilmington—the party that actually exercised the privilege—had no such interest,” said the court.
The decision was met with dismay by the life settlement market.
“We disagree with the Ninth Circuit’s decision and are disappointed in the reversal,” said Bryan Nicholson, Executive Director at industry group the Life Insurance Settlement Association (LISA).
“Clarity and consistency in how these policies are treated are essential to protecting consumers and maintaining confidence in a well-regulated secondary market.”
“Policyholders paid for these policies. They should be able to rely on their value, including the ability to sell them. Changing the rules years later undermines that consumer confidence,” added Rob Haynie, Managing Director of Life Insurance Settlements, Inc., and Board Chair of LISA.
The reversal by the Ninth Circuit is not necessarily final. Wilmington could file petition for an en banc review, asking that the full panel of 11 judges (as opposed to only the original three of the merits panel assigned to the appeal) in the Ninth Circuit to consider the merits of the appeal which could end up overturning the decision. It is noteworthy that one of the three members of the merits panel issued a dissenting opinion.
Additionally, the reversal is not precedential, thanks to the decision being ‘unpublished’; while it can be cited to, and argued to be persuasive authority, it isn’t binding authority.
But if the decision becomes precedential, either via an official opinion or an en banc review, this one, in theory, could result in a split between the federal circuit courts in the U.S. That’s because the Southern District of New York is also working its way through its own version of Moghadam and while the current state of play is at the district court level, the ruling here is in the life settlement market’s favour.
In her March 26, 2026, bench ruling in Zaben, LLC, et al., v. John Hancock Life Insurance Company of New York, et al. (Zaben), Senior U.S. District Judge Cathy Seibel ruled that the term-to-permanent conversion of the life insurance policy taken out on the life of Israel Weinstock did not result in a new policy, but rather was a continuation of the original term policy. Therefore, no insurable interest evaluation was required as a result of the term conversion.
“I find that the UL Policy was a continuation of the Term Policy rather than a distinct independent contract. As such, the UL Policy, like the Term Policy, is governed by New York law and thus, JHUSA is barred from contesting its validity under the incontestability provision,” said Judge Seibel.
Something notable in Judge Seibel’s ruling was her criticism of the Ninth Circuit’s decision.
“Indeed, even the Ninth Circuit’s reasoning on the point is questionable. The Circuit disagreed with an analogy used by the District Court, which had found, in its decision at 2024 WL 4402028, at page 7, that ‘if you convert a convenience store into a restaurant, you have not bought a new building, you have merely changed the character of the building you already owned. By contrast, if you buy a new restaurant, you have also bought a new building.’ And the District Court emphasized ‘convert a new’ in that quote. The Ninth Circuit, however, said, ‘converting a store into a restaurant might not produce a new structure, but it, indeed, produces a new restaurant.’ That’s the Ninth Circuit at page 1, note 3. But the Ninth Circuit fails to acknowledge that the subject of that hypothetical did not own a restaurant in the first place, he owned a building, the characteristics of which changed.”
So, suddenly, there are two opposing legal views. Counsel for John Hancock informed Judge Siebel that they would make a motion for certification of an immediate appeal of the issue to the Second Circuit Court of Appeals, which the judge indicated was a good idea. Thus, the likelihood of an appeal in Zaben is as certain as it can be at this moment in time.
Depending on how the Ninth Circuit rules on a petition for en banc review, and how the Second Circuit rules with respect to the Southern District of New York’s decision, a federal circuit split may develop. In any event, the value of term policies with a conversion privilege has likely been reduced in the market, especially policies that may be subject to litigation within the Ninth Circuit, which is an unfortunate side effect that will negatively affect primarily individual owners of term policies who no longer want or need those policies.
Attorneys for the plaintiffs and defendants in these cases did not take the opportunity to comment prior to publication.
