Insurable interest worked fine for 200 years or so until the life insurance business itself changed. Despite its name, the industry doesn't sell as much "life insurance" anymore. Life companies now peddle financial services, particularly annuities. Variable annuities were developed in the 1950s, initially as a way to give teachers retirement options. Insurable interest was not an issue and could have been an impediment to widespread adoption of the product.

Caramadre did his research and concluded that Rhode Island law did not require that people buying variable annuities have an insurable interest.

As imagined by the insurance companies, variable annuities have two participants. There's the investor, the person who puts up the money. That person typically also serves as the annuitant, or the "measuring life." If that person dies, the death benefit is paid to the beneficiary, usually a spouse or child.

Caramadre realized it didn't have to be that way. There was no requirement that the investor and the annuitant be the same person. In fact, as he read the contracts, the annuitant didn't need to have a relationship with the investor at all. Caramadre or one of his clients could buy an annuity on the life of someone who was not expected to live long and then pocket any profit when that person died.

"All we need to do is replace the necessity of the investor having to die, with someone else, dying," says Caramadre.

If they chose well, the account went up and they reaped the benefits. If they chose poorly, the death benefit kicked in and they recouped their original investment.

"If you won, you keep the winnings. If you lose, they give you your money back," says Caramadre.

There is something morally unsettling about this. Put simply: Caramadre was setting himself and his clients up to profit from the demise of strangers. While the macabre aspect of his scheme offends many, it did not make Caramadre squeamish. He rationalized that a lot of people — funeral homes, hospitals and cemeteries — make money from the dead and dying, why not him?

Caramadre's insight might have remained a curiosity were it not for something called "the arms race." As competition intensified in the mid-2000s, many life insurance companies launched an unprecedented war for customers, offering benefits they now acknowledge were far, far too favorable.

The insurance companies' contracts provided little defense against Caramadre's approach. For policies under a million dollars, they didn't check the health status of people receiving variable annuities. Instead, they limited the ages of annuitants or the amount that could be invested. All that the companies required for persons to serve as a measuring life was their signature, birthdate and Social Security number. Some didn't even require the signature.

There was usually only a single line that touched on insurable interest in the contract. Companies would ask if a relationship existed between the investor and the annuitant. Caramadre and the men with whom he worked would either leave the answer blank or type in "none." The companies, eager for business, took the policy anyway.

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