The "life settlement" bond market: If this guy croaks, I make $175,000

[yllus]

Be aware that this is an old thread with information added today by a licensed life settlement broker.
admin allisolm

Mild apologies for the crass topic title - I couldn't think of another good summary for the topic content.

This is one of the odder things I've come across lately, though it makes perfect sense: The elderly and otherwise gravely ill get cash now to ease their last days, the "investor" gets a substantial payoff down the road. The topic arose due to a discussion in my province of whether these types of transactions should be made legal here: Serious concerns about preying on the old and ill, whether or not life insurance in general would shoot up as a result of this new market.

It's a three page article that I've cut down to the little shown below. Click through for a full viewing.

Insurance: Dead set against it?

Right now, somewhere in Toronto, someone is dying. He has congestive heart failure and diabetes. He has spent time in the hospital, and almost passed away last year. It seems he is not long for this world.

That's sad, of course. But for someone else in Toronto, his death will mean a windfall because this man has a $350,000 life insurance policy. Or, at least, he had it. He sold the policy some time ago for a fraction of its value. Now the buyer of the policy is in need of some quick cash and is looking to sell it again. Don Jones, an insurance broker in Seattle, is trying to facilitate the sale — asking price: $175,000.

If he can swing a deal, Jones will collect a handsome finder's fee. The seller will get a quick, six-figure payout. And whoever buys the policy will double their money, just as soon as the insured man passes away. It would seem to be a win-win transaction — if a pesky ethical quagmire, and some thorny legal questions, didn't come along with it.

...

Life settlements, a booming, if somewhat misunderstood, multi-billion-dollar business in the U.S., are illegal in most Canadian provinces. All but four (Quebec, Saskatchewan, New Brunswick and Nova Scotia) have laws explicitly prohibiting trafficking in second-hand life insurance policies. And even in provinces where there are no laws expressly against life settlements, securities regulators are suspicious of them, which makes finding seed capital tricky.

...

Critics — with insurance companies being foremost among them — say such a market is ripe for exploiting the old, the frail and the desperate. Not only that, many warn a secondary market would drive up insurance premiums for everybody else, since current rates are based on the fact that some policies will default.

Proponents, however, point out that life settlements provide insurance policy owners with financial options they wouldn't otherwise have. Although most insurance companies already provide people the option of buying the policy back, life settlement advocates claim that people often get 400% more cash for their policy through life settlements than they would get from their insurers.

 

[loldoctor]

Mild apologies for the crass topic title - I couldn't think of another good summary for the topic content.

This is one of the odder things I've come across lately, though it makes perfect sense: The elderly and otherwise gravely ill get cash now to ease their last days, the "investor" gets a substantial payoff down the road. The topic arose due to a discussion in my province of whether these types of transactions should be made legal here: Serious concerns about preying on the old and ill, whether or not life insurance in general would shoot up as a result of this new market.

It seems to offer very wrong incentives for the person who would benefit from another's death.

 

[JEDIYoda]

It seems to offer very wrong incentives for the person who would benefit from another's death.

how so?
Ya think....

 

[CycloWizard]

It seems to offer very wrong incentives for the person who would benefit from another's death.

Any legal protections involving a life insurance policy should still be in place (e.g. it's not going to pay the benefactor if the benefactor offs the policy holder). I'm not sure what the ethical quandary here is unless we're worried that the family gets nothing and the investor gets everything.

 

[loldoctor]

Any legal protections involving a life insurance policy should still be in place (e.g. it's not going to pay the benefactor if the benefactor offs the policy holder). I'm not sure what the ethical quandary here is unless we're worried that the family gets nothing and the investor gets everything.

Yes, and usually life insurance policies don't pay out if the policy holder commits suicide, yet some policy holders still try that anyway.

 

[CycloWizard]

Yes, and usually life insurance policies don't pay out if the policy holder commits suicide, yet some policy holders still try that anyway.

That's insurance fraud. I don't see how that's related to this issue, unless you're worried about the policy holder offing himself, thereby preventing the investor from collecting on his investment. I suppose this is a risk assumed by the investor: if you want a huge payback on your investment, then I would think this risk would be worthwhile, though there is no reason the investor couldn't do their due diligence (e.g. having a psychological profile of the policy holder done before you buy the policy).

 

[yllus]

It seems to offer very wrong incentives for the person who would benefit from another's death.

That part I wouldn't be worried about. It's the broker (middleman) side of things that everyone seems to be concerned about:

In analyzing the industry for the Conference for Advanced Life Underwriting, Ed Rothberg, former general counsel to Advocis, Canada's financial advisers association, highlighted ways life settlement brokers have run scams. They can commit life expectancy fraud by convincing investors that a policyholder will die before the data suggest; or "dirty-sheeting," wherein they help healthy people obtain false medical information saying they are gravely ill to expedite the sale of that policy.

They can encourage people to take out life policies with the sole intent of selling them two years later to turn a small profit. And of course, life settlements, like all investments, aren't free from the long shadow of the Ponzi scheme.

...

Kahan had a viatical loan business in Nova Scotia a few years ago, and is trying to set up another company called Canadian Life Options in Quebec, which would provide loans on viaticals and life insurance policies, but the process has been slow. "It's difficult to find investors who won't be too greedy and start ripping off the policyholders," he says.

Kahan knows enough about the history of life settlements to recognize the danger of mixing them with the free market, which is why he still favours government involvement.

 

[actuarial]

Yes, and usually life insurance policies don't pay out if the policy holder commits suicide, yet some policy holders still try that anyway.

That's not always (or at least not always completely) true.

For example, my current life insurance covers suicide, but only after a 2 year waiting period. Thus I can't go purchase insurance and immediately off myself, but it does cover suicide.

2 years is a pretty long waiting period, and anyone who's insurance is paid up (which I imagine is needed to sell the policy), would be out of that period.

While I'm sure not all policies cover suicide, I know that recently when shopping for life insurance that most had at least a similar provision (though with differing waiting periods).

 

[WHAMPOM]

Just another example of greed overcoming ethics. The vultures that profit from this should be shot as they deserve.

 

[CycloWizard]

Just another example of greed overcoming ethics. The vultures that profit from this should be shot as they deserve.

Why is this unethical? I'm not seeing it.

 

[JSt0rm]

How do I get into this market?

 

[sandorski]

I don't think there's any danger to the person the Policy would be based, at least not a widespread danger. What is a danger is that this will turn into a huge Industry and Bubble that will end as badly as the more recent Bubbles have. This is something that should be legislated out of existence.

 

[GreenBridgeLS]

First I must disclose that I am a licensed life settlement broker in California. I only assist those looking to sell their policy. While I am not familiar with Canadian laws on this topic, I can comment on the legitimacy of this industry. In California, life settlements are highly regulated and are very much accepted as a viable option for those who have the need or desire to sell their policy.

To understand why life settlements are so important, consider the fact that approximately 90% of the life insurance policies sold in America never pay a death benefit. While there are many reasons a person would allow their policy to lapse, the most common include the inability to pay premiums or they simply no longer need the coverage, i.e. term insurance.

Here's a great example of an actual transaction involving a term policy. The owner, just about to turn 70, was paying approximately $3,600 a year for $400,000 of coverage. He was notified by his insurance company that his premium cost would rise to over $10,000 per year if he chose to renew upon his 70th birthday. Not being able to afford the increase, he had decided to not renew. However, because his health was marginal and his policy could be converted to a permanent policy, the policy was sold on the secondary market netting him $90,000 dollars.

If he had not known of the life settlement option, his policy would have lapsed and he would have nothing to show for the years of premiums paid. Instead, the money he received was very much needed to cover medical bills and living expenses. In fact, since people are now living longer than ever, it's not at all uncommon, even for those that prepared for retirement, to simply run out of money. For those facing monthly assisted living or nursing home costs that can run $5,000 to $10,000 a month in the U.S., the ability to sell one's life insurance policy can make a huge quality of life difference.

Yes, there are drawbacks that should always factor into one's decision, including the fact that the beneficiary will not get a death benefit. However, in some cases, even that can be dealt with by selling only portion of the benefit and retaining a portion of coverage for the beneficiaries.

I hope this sheds a bit of light on the topic.

 

[Fern]

Why is this unethical? I'm not seeing it.

I don't either.

I've had clients look at it, which means I look at it.

I don't see it as a whole lot different than a reverse mortgage.

Sure, for both there are times when it's not advisable, but that's nothing out-of-the ordinary.

Fern

 

[halik]

There was a guy in the US that is facing charges for taking out misplaced life insurance policies on other people's behalf and donating the windfall for charity.

 

[Matt1970]

Just another example of greed overcoming ethics. The vultures that profit from this should be shot as they deserve.

The guy sold his policy. You are either advocating making that practice illegal or advocating that someone should pony up money in exchange for a worthless piece of paper.

 

[sm625]

In the aggregate, this sort of thing cant possibly work. Everyone dies eventually, so the more people sell their policy, the more certain you can become as far as return on investment is concerned. Which basically means this is nothing but a credit creation scheme, ie money printing. If everyone buys a policy, and everyone turns around and sells that policy, they can then simply buy another policy and then sell that, then buy another then sell that, ad infinitum until the scheme becomes obvious and breaks down / blows up. (And takes the economy with it.) This could become a huge bubble driver, probably for the next business cycle rather than our current one.

 

[michal1980]

hmm. need to find a way to turn this into a stock market. maybe buy up a few policies then divided them up into shares. buy up quite a few of them, so theres always money coming in.

 

[Meghan54]

In the aggregate, this sort of thing cant possibly work. Everyone dies eventually, so the more people sell their policy, the more certain you can become as far as return on investment is concerned. Which basically means this is nothing but a credit creation scheme, ie money printing. If everyone buys a policy, and everyone turns around and sells that policy, they can then simply buy another policy and then sell that, then buy another then sell that, ad infinitum until the scheme becomes obvious and breaks down / blows up. (And takes the economy with it.) This could become a huge bubble driver, probably for the next business cycle rather than our current one.

I don't think you really understand what's being discussed. The ins. policies being sold aren't the "cheap" term policies but permanent type, like whole life. Term policies have no residual value at all while whole life policies do after a few decades of payments.

So, I don't think one person is going to be buying and selling numerous policies.

 

[jagec]

It seems to offer very wrong incentives for the person who would benefit from another's death.

So, just like normal life insurance, then.

 

[sactoking]

In the aggregate, this sort of thing cant possibly work. Everyone dies eventually, so the more people sell their policy, the more certain you can become as far as return on investment is concerned. Which basically means this is nothing but a credit creation scheme, ie money printing. If everyone buys a policy, and everyone turns around and sells that policy, they can then simply buy another policy and then sell that, then buy another then sell that, ad infinitum until the scheme becomes obvious and breaks down / blows up. (And takes the economy with it.) This could become a huge bubble driver, probably for the next business cycle rather than our current one.

Life insurers generally require you to disclose any other policies that may exist on your life, regardless of who the owner or beneficiary of the policy is. This is to prevent being "overinsured." If you fail to disclose existing coverage and later die and a claim is made the insurer may be able to claim a material misrepresentation on the application, rescind the policy and return the premiums paid (without interest).

 

[SunnyD]

Life insurers generally require you to disclose any other policies that may exist on your life, regardless of who the owner or beneficiary of the policy is. This is to prevent being "overinsured." If you fail to disclose existing coverage and later die and a claim is made the insurer may be able to claim a material misrepresentation on the application, rescind the policy and return the premiums paid (without interest).

I would say it's less about being "overinsured" (not really even such a thing) as it is about competition - they don't want you taking out several cheaper lowerer value policies with competitors where they can be making a higher margin premium off a larger value policy with them.