Securitizing Life Settlements

September 8, 2009 8:25 AM

Goldman will package a bunch of life insurance policies of individuals with an alphabet soup of diseases: AIDS, leukemia, lung cancer, heart disease, breast cancer, diabetes, and Alzheimer’s. The idea is to diversify across diseases to protect “investors” from the horror that a cure might be found for one or more afflictions–prolonging life and reducing profits. These policies are the collateral behind securities graded by those same ratings agencies that thought subprime mortgages should be as safe as US Treasuries. Investors purchase the securities, paying fees to Wall Street originators. The underlying collateralized humans receive a single pay-out. Securities holders pay the life insurance premiums until the “collateral” dies, at which point they receive the death benefits. Naturally, managed money hopes death comes sooner rather than later.

A Reuters blogger comments:

... life settlements are potentially very bad for the insurance industry... Life insurers, unlike most investors, pay no tax on their investment gains. That’s why buying a life insurance policy is generally a very tax-efficient way to invest money you want to leave to your heirs. But if these policies start being traded on the secondary market, with the benefits going not to heirs but rather to hedge funds and traders, then there’s a serious risk that the life insurance industry will lose its tax-sheltered status. The Wall Street banks looking at securitizing life settlements should be very worried about this: if they start showing signs of success, Congress could, at a stroke, kill their golden goose.

posted by Joe Beese (78 comments total)

Naturally, managed money hopes death comes sooner rather than later.

naturally, that's a "good" argument against health care reform right there

the mind boggles
posted by pyramid termite at 8:31 AM on September 8

What could possibly go wrong?
posted by enn at 8:31 AM on September 8 [4 favorites]

Needs more Death Panel Synergy.
posted by Burhanistan at 8:32 AM on September 8 [9 favorites]

At this point, you may all henceforth consider my mind blown.

Seriously. WTF Wall Street?
posted by Alterscape at 8:32 AM on September 8 [2 favorites]

The Wall Street banks looking at securitizing life settlements should be very worried about this: if they start showing signs of success, Congress could, at a stroke, kill their golden goose.

If there's one thing Congress is well-known for, it is screwing over the big guys.
posted by DU at 8:33 AM on September 8 [12 favorites]

Death  Panels  Securitized Debt Obligations
posted by odinsdream at 8:36 AM on September 8

Oh my god. They've managed to combine the horror of CDOs with the horror of life insurance.

I have to go lie down now.
posted by Pope Guilty at 8:36 AM on September 8 [14 favorites]

So I have this idea for an investment product: hate crime futures. A person can sell their hate crime futures, with the payout proportional to their risk of hate crimes: a black gay muslim athiest prostitute, for example, would be able to collect a fairly large sum. On the event that the person selling the futures is the victim of a hate crime, her investors have the proxy right to bring civil suit under hate crimes law, and collect all damages in proxy.
posted by idiopath at 8:38 AM on September 8 [10 favorites]

Securities holders pay the life insurance premiums until the “collateral” dies, at which point they receive the death benefits.

Isn't the point of insurance in general that the insurer always takes in more in premiums than they pay out in benefits? It seems like this scheme is counting on the opposite to be true. Wall street should just take this money and invest it in insurance companies, since they are the ones that set themselves up on the winning side of the equation.
posted by burnmp3s at 8:38 AM on September 8

Ah, too bad Helen Golay and Olga Rutterschmidt didn't have an army of lawyers and lobbyists to legalize her business. Just another example of big corps using regulatory capture to take revenue from the little entrepreneurs out there.
posted by delmoi at 8:40 AM on September 8

Oh my god. They've managed to combine the horror of CDOs with the horror of life insurance.

It's Phillip K. Dick-alicious.

I'm going to regret the "Dickalicious" aren't I?
posted by Durn Bronzefist at 8:40 AM on September 8 [8 favorites]

Despite the negative framing of this post, I fail to see the great moral problem with this practice. The point of life insurance isn't to guarantee a large inheritance to survivors, but to minimize the financial hardships that your death might cause on dependents. So if someone has lived long enough to have no more financial obligations that would burden survivors, why should it be so bad that they can cash out their policy and enjoy the money?

And if the idea that a stranger might actually make money off of their death (you know, other than everyone involved in the funeral business), they always have the option of taking their own life. That tends to nullify every life insurance policy I've ever heard of.
posted by wabashbdw at 8:41 AM on September 8 [5 favorites]

Ahh, finally. The democratization of the death pool.

Now, someone needs to hurry and turn next season's The Amazing Race into Running Man so we can hit the '80s dystopia jackpot.
posted by Iosephus at 8:42 AM on September 8 [3 favorites]

Isn't the point of insurance in general that the insurer always takes in more in premiums than they pay out in benefits? It seems like this scheme is counting on the opposite to be true.

On average, but not in every single case (otherwise people could just save their money, rather then buying insurance)

What Goldman is doing is looking at cases of people who have certain features that are not taken into account by the insurance company, such as having AIDS or cancer, which makes them more likely die before they've overpaid their premiums. It's essentially actuarial arbitrage.
posted by delmoi at 8:44 AM on September 8 [4 favorites]

So these guys are buying life insurance policies from dying people? I don't see what's wrong with that, actually. How much are they paying on the dollar?
posted by empath at 8:47 AM on September 8

This story is pretty overblown, and somewhat typical of NYT's most recent coverage of anything Wall St related.

Life settlements are nothing new. In fact, they are close to a two decades old. NYT even wrote a more-balanced version of this article in 2006, before Wall St hate was the new black.
Currently its a highly unregulated market run by small, unregulated firms who run late night informercials and google ads. (Take a look at the results of a search for "life settlements").

New York State actually runs an FAQ site to educate people on the subject -

The only new(ish) part, is the attempt, and I emphasize attempt, to securitize the life settlements. They really haven't gotten very far with that in the last 14 years.

For a good critique of the NYT article, check out what Felix Salmon has to say.
posted by gomess at 8:49 AM on September 8 [12 favorites]

this world of ours. fascinating what people will do for money.
posted by localhuman at 8:49 AM on September 8 [1 favorite]

well you have to do more than what's been done before. find a new efficiency, get rid of a lingering waste of resources. after the dog's done chewing on the bone, the micro-organisms continue to clean away what still remains.
posted by nervousfritz at 8:51 AM on September 8

a black gay muslim athiest prostitute, for example

An atheist muslim? I think that would incite more confusion than outright hatred.
posted by hermitosis at 8:52 AM on September 8 [1 favorite]

...they always have the option of taking their own life. That tends to nullify every life insurance policy I've ever heard of.

In fact, many life insurance policies DO pay-off for suicide. Commonly, there is a "cooling-off" period, where the benefit is not in-force...typically for 5 years following the purchase of the policy. The policy I carry, in fact, pays-off in-full in the event of my suicide. I didn't ask for it. It was a standard piece of the policy. YMMV, of course.

The idea that life insurance never, ever pays for a suicide is a falsehood that seems to be perpetuated by tv crime shows.
posted by Thorzdad at 8:52 AM on September 8 [1 favorite]

These do present a nice way for terminally ill patients or elderly to make use of a portion their life insurance settlements before they die, so I suppose that's a good thing.

But this part of the deal:
Securities holders pay the life insurance premiums until the “collateral” dies, at which point they receive the death benefits.

I wonder how long we'll have to wait for a story to break about someone putting out a contract on their "collateral" to get out of paying premiums?
posted by Uncle Ira at 8:53 AM on September 8

This has been going on since the 80's, but it was always a fairly small and uninteresting practice area. The big players are only getting into it now because they need to feed the institutional sales pipeline with something, not because it's suddenly seen as a brilliant idea.
posted by Spacelegoman at 8:53 AM on September 8

Life settlements are nothing new. In fact, they are close to a two decades old.

I remember that they used to be publicized in advertisements aimed at HIV-positive gay men, so that they could pay their medical bills. Some of these settlements completely backfired, though, because new developments in anti-retroviral drugs greatly lengthened the time that a person with AIDS could survive.
posted by jonp72 at 8:55 AM on September 8

In fact, many life insurance policies DO pay-off for suicide.

I never knew that. I must have watched too many TV crime shows as a child. Thanks for the info.
posted by wabashbdw at 8:55 AM on September 8

A big company saying "Hey bet you'll die before you're 70", and an insurance company saying "NUH UH!", shaking hands and putting up a million dollars on the outcome is pretty dysfunctional.

Goldman Sachs spent millions to get that extra millisecond advantage for stock trades, netting them a few thousand per trade per day.

You think someone won't have the bright idea to push back against healthcare reform, environmental regulations, or anything that improves the health of the population, just to eek out that extra percentage points on their investments?

Suddenly it becomes in these companies best interests to make sure we die right on schedule. That's fucked. Not a little fucked, but fullbore dystopian fucked.
posted by Lord_Pall at 8:55 AM on September 8 [9 favorites]

hermitosis: "An atheist muslim? I think that would incite more confusion than outright hatred."

This paper from Harvard should clear up any confusion you may have about atheist Muslims.

In retrospect I definitely should have thrown in communist for the extra persecution-fodder points.
posted by idiopath at 8:59 AM on September 8

On average, but not in every single case (otherwise people could just save their money, rather then buying insurance)

Yeah, I worded that badly, I meant that in aggregate the insurance companies take in more premiums than they pay out in benefits.

What Goldman is doing is looking at cases of people who have certain features that are not taken into account by the insurance company, such as having AIDS or cancer, which makes them more likely die before they've overpaid their premiums.

Which makes sense I guess. Getting a terminal illness after getting life insurance at a locked in rate is actually a sort of "win" in that the expected amount paid in premiums will be less than the benefit amount. The article also mentioned that a significant number of policies lapse, so there must be some discount baked into the premiums that account for not everyone actually receiving a benefit when they are entitled to one.

Overall it does seem straightforward that people would be able to sell their under-priced life insurance policies in cases where they have a worse life expectancy, and it might make sense for people in those situations to cash in and use that value to pay for things like health care. On the other hand, I'm not sure if it's a good idea to create a whole industry around betting that people will die more quickly than expected. Really if this type of fund works though, the insurance companies themselves should just buy back the policies at reasonable rates, because by cutting out the middle man that way they would be able to get a better return than these funds ever could.
posted by burnmp3s at 9:01 AM on September 8 [1 favorite]

.....So their answer to the health care crisis is to do exactly the same thing which brought about the recession?

See, this is why I don't do drugs. Reality is trippy enough.
posted by EmpressCallipygos at 9:03 AM on September 8 [3 favorites]

That tends to nullify every life insurance policy I've ever heard of.

Most life insurance policies only have a six-month (good policies) to two-year (average policies) suicide exclusion periods. After that, you're good to go. Virtually no policies have total suicide exclusion. You just have to plan well ahead.

Anyway, I don't really get the outrage here. Life insurance has always been a bit of a ghoulish product when you get right down to it; it's those actuarial tables that give you the estimates of exactly how long you'll live, statistically, depending on where you live and what your job is and what kind of car you drive and everything else—it's a dismal science if there ever was one. Life settlements are even more creepy, because the company you sell your policy to profits more the sooner you die. However, absent them actually going out and helping their clients along, I'm not sure that's really an indication that it ought to be illegal; allowing people to cash out their life insurance policies strikes me as a good thing.

There are lots of situations where I can imagine a person wanting to access the money tied up in a policy before they die rather than after (e.g.: a married couple with no kids each have a policy on themselves payable to the other spouse—after the first spouse dies, their survivor might want to access the money in their own policy rather than have it just become part of the estate). This is especially true for people who are anticipating their own deaths well in advance and have made arrangements.

For most people, the purpose of life insurance is to ensure that their untimely demise won't put their family in a financial bind, or leave them unable to make payments on a house or otherwise make ends meet. If you are in a situation where those things are taken care of and you have a have a short time to live, that $200k policy might look pretty tempting to take as a lump sum to enjoy while you're still able to use it.
posted by Kadin2048 at 9:03 AM on September 8 [3 favorites]

It's the high-finance version of a dead pool.
posted by Mcable at 9:05 AM on September 8

You think someone won't have the bright idea to push back against healthcare reform, environmental regulations, or anything that improves the health of the population, just to eek out that extra percentage points on their investments?

If this is for people over 65, they'll already have medicare.
posted by delmoi at 9:05 AM on September 8

Ooops. On preview, I missed Iosephus's comment.
posted by Mcable at 9:06 AM on September 8

Isn't the point of insurance in general that the insurer always takes in more in premiums than they pay out in benefits?

The angle here is that Life Insurance companies price their policies assuming that at least some insureds will stop paying the premiums and thus the policy will lapse. This is either because the insured no longer can afford the premiums or because they no longer feel they need the coverage.

When a policy is bought by a Life Settlement company, however, you can be sure they will pay the premiums and keep the policy in force until they receive the death benefit.
posted by 2bucksplus at 9:12 AM on September 8

TV Nation covered "AIDS insurance brokers" back in 1994.
posted by Combustible Edison Lighthouse at 9:15 AM on September 8

Despite the negative framing of this post, I fail to see the great moral problem with this practice.

Well, try this one on for size. From the article:

"Indeed, Mr. Doherty says that in reaction to widespread securitization, insurers most likely would have to raise the premiums on new life policies. "

So all this process do is: 1) increase premiums, 2) make some money for wall street.

It doesn't change anything in the insurance policies themselves, all it does is move money from policy holders to wall street, with no other added benefit at all. You may not have a "great moral problem" with it, but it sure makes me dislike wall street a bit more.
posted by DreamerFi at 9:20 AM on September 8 [7 favorites]

I used to think Vegas was a blight on the landscape. A glittering Easter Island of a reminder of the folly of the Moai of status, misdirected labor, the American Marae to greed built, sagaciously, in an area which didn't need to be cleared of trees beforehand.
But now I'm thinking it is the landscape. Like in the tierra baldía where bedrock juts from the raw earth and reminds you of all these orogenic events being driven by the Plutonic forces just under your feet.
This? This is the Devil's Tower, man.
Nifty Sioux story (Sicangu in this version, I think) about Devil's Tower (or Bear Rock). Two kids were out playing, hunting, etc. when a giant bear, Mato, came running after them to eat them. They ran away and prayed (to Wakan Tanka) to save them. Suddenly the giant rock came out of nowhere and the marks on the side are from the giant bear's claws trying to get them. And so, they were saved.
The part I like, the part reserved for the storytellers, is the question: how did they get down?

So too, here, it doesn't much matter what congress does. I mean, you can lobby for nearly anything and, spread around enough money, get it. So the downside, the bitter, far as I can see, isn't that it's "a return to the good old days," but rather the bitter is the sweet bit.
I mean, once you start feeding on human flesh to save you - once you become a f'ing ghoul by trading on and investing in people's misery and banking on them dying early - how do you come back?

I'm just picturing some assheads in suits with just not enough goddamn money saying "hey, guys, we're already screwing people into dying by depriving them of health insurance coverage, but...they're dying. How do we make a buck off that?"
"Saaay, good one Morty. I've got an idea! People dealing with loved one's who are terminally ill are vulnerable and weak..."
posted by Smedleyman at 9:22 AM on September 8 [10 favorites]

I heard about a company that was doing this a few years ago. It made the news (in Canada at least) because a person who was diagnosed with HIV was living way longer than expected due to new treatments. The company that had purchased her life insurance had agreed to cover her health care costs (and possibly provide a certain sum in addition). Because of her longer life and the additional cost of the treatments, the company was well into the red on this particular individual.

The upshot of this was she was receiving threatening calls and letters (anonymous, but presumably from investors/board members). The company claimed they could call off the deal at any time, thus legally halting the financial support and relinquishing claims to the life insurance, but hadn't yet. I wonder how that turned out.
posted by ODiV at 9:25 AM on September 8 [1 favorite]

my understanding was that insurers typically make money investing the premiums. they could actually pay out more than they took in from premiums, if they invested well.
posted by snofoam at 9:28 AM on September 8

It's a bit perverse but the car insurance industry has a similar ethical quandary. They need improvements in car safety that leave those in car accidents without permanent injury... or dead.

Back when I was a personal lines analyst the payout for a death was around $200K. The amount of money reserved in a case of partial paralysis to full paralysis was $1 million and $2 million respectively.

I'm surprised they haven't lobbied for a car safety device that fills the car with foam on an impact. If you are relatively uninjured you can escape the car. If not you drown. No more million dollar reserves ever needed.
posted by srboisvert at 9:31 AM on September 8 [1 favorite]

As ghoulish as it is, there is a place for this type of secondary insurance market. I had a friend with AIDS who struck such a deal on his life-insurance and lived large until he died. His partner had already died, so he didn't really have anyone to leave anything to, so why not?

Without this windfall he would not have been able to do the traveling he wanted to do nor would he have been able to live well on disability. It was a total blessing to him.

There are tax ramifications, and those should be addressed, but hey, it's America and where there's a buck to be made, someone will figure out a way to make it.
posted by Ruthless Bunny at 9:36 AM on September 8 [1 favorite]

I can already hear the Law and Order writers scribbling away. Basic plot: people are dying, no particular connection between them...until one of the smart detectives notices they've all sold their life insurance policies to Firm_X, which pays out bonuses to their sales force based on how quickly their 'clients' die, and one of the sales team has a bad gambling addiction and...well, there ya go.

Why don't they reverse it, and if you DO make it to, say, age 100 then they win. You can bet on extra long lifespans as well as you can bet on people dying early, just have to figure out how to market that as a product. Of course, with our health care system, betting on anyone living to be 100 might not be all that marketable no matter how you package it.
posted by jamstigator at 9:39 AM on September 8

It does seem, anymore, that anything that's not explicitly forbidden is mandatory. I blame the surreal and corruptive influence of JL Borges.
posted by Mister_A at 9:39 AM on September 8

It's essentially actuarial arbitrage.

SO WRONG.

As much as I like arbitrage in general - it is a pretty key element in any economy - this just ain't cool. Plus I wonder how long until the insurance companies adjust premiums to close this gap? I mean, why give Goldman the money when the insurers themselves could simply keep it? Seems like it would be easy for the market to increase its efficiency to remove the profit from this.

Congress could, at a stroke, kill their golden goose.

Congress has nearly given me a stroke several times. And not just Ted Stevens!
posted by GuyZero at 9:42 AM on September 8

That auto industry anecdote made me remember what we were told when entering Turkey as part of the military, in our orientation briefing: if you're driving and you hit a Turk, back up and run him over until you're sure he's dead, because paying off his family is cheaper than paying for lifelong medical care. Life is cheaper than health care I guess. Or death is, however you wanna look at it.
posted by jamstigator at 9:44 AM on September 8

Isn't the point of insurance in general that the insurer always takes in more in premiums than they pay out in benefits?

No, actually.

Almost all life/casualty/property insurance companies pay out more in claims than they receive in premium. But premiums happen now, and losses happen later, so they take advantage of the time differential by investing the premiums until they're needed for payout. Basically, they get to use your money to make money with, until someone in your pool needs it back. This money is called 'the float', and the amount paid out over premium is the 'cost of float'. It's a lot like an interest rate -- the insurance company is paying for the privilege of using your money.

This is a lot of how Warren Buffett got so wealthy. He gets very excited when his insurance subsidiaries have great years; he crows about the times when they have a negative cost of float... people are actually paying them to hold money! He LOVES it when that happens.

I just now had this idea, so I don't know how solid this is..... but the thought occurs that the Fed holding interest rates so low may be a direct cause of insurance rates going up. If they can't make money on the float, they'd have to actually make a profit on their policies.
posted by Malor at 9:48 AM on September 8 [3 favorites]

once you become a f'ing ghoul by... banking on them dying early

You can bet on extra long lifespans as well as you can bet on people dying early, just have to figure out how to market that as a product.

The product for this is called Life Insurance. The policy holder is betting a certain amount each month that they will die early, while the insurer is betting a large amount that the person will live a long time.

Life Settlements, on the other hand, just reverse the roles. This isn't that big a deal and, like others have said, has been ongoing for decades.
posted by wabashbdw at 9:50 AM on September 8 [1 favorite]

You know, I read these types of stories about collateralizing risk, and I'm struck by one thing--they always seem to falsely paint a moral side to the economics of this, as if somehow, the investors are actually "hoping" that there is no cure for cancer or something like that.

This is certainly not the case. Setting aside the actual economics of the thing (could be a bad idea, certainly), there isn't a supervillan under NYC planning to thwart cancer research so he can profit on these securities--indeed, most certainly, there are some investors in these vehicles who are suffering themselves from the diseases in question. Instead, people are looking at ways to spread risk in such a way so as to lessen it.

Not knowing enough about the underlying securities and wary because of the problems with the unregulated CDS swaps, I feel they could be a problem. However, I think that the fake moral angle is really just that--fake. It doesn't add to the debate and has a whiff of the fakery that the Republicans are known for. Let's address these issues without the fake "People want other people to die for profit!" angle. Because it isn't true.
posted by Ironmouth at 9:59 AM on September 8 [1 favorite]

NOW can we hoist the black flag and commence with the throat slitting?
posted by Scoo at 10:01 AM on September 8 [1 favorite]

they could actually pay out more than they took in from premiums, if they invested well.

...

Almost all life/casualty/property insurance companies pay out more in claims than they receive in premium. But premiums happen now, and losses happen later, so they take advantage of the time differential by investing the premiums until they're needed for payout.

Yeah, I understand that, as I said before that sentence was poorly worded. My point was that having an insurance policy is not "a very tax-efficient way to invest money you want to leave to your heirs" as stated in the post, because the insurance companies wouldn't have the system setup in a way that in general paying premiums would be a better deal than accepting those premiums and paying out the benefits. A fund would be better off investing money however the insurance is doing it and collecting that revenue, rather than buying completely random insurance policies.

The thing that I was missing was that these funds would be purposely avoiding the policies of healthy people, because from the fund's perspective those policies are basically worthless. There is subset of policies (such as people with various diseases) that will probably outperform competing investments if someone pays the premiums and collects the benefit. But to me at least it seems like the insurance companies themselves would be in the best position to buy these policies, because it would save them the trouble of having to collect the premiums and pay out the benefits, and because they are in a good position to price them. The fund setup would only make sense if there's some reason that the insurance companies aren't willing to pay anything close to fair market value for a policy if the holder wants to cash it in.
posted by burnmp3s at 10:12 AM on September 8

Suddenly it becomes in these companies best interests to make sure we die right on schedule. That's fucked. Not a little fucked, but fullbore dystopian fucked.

Just wait until Goldman Sachs starts investing in organ banks.
posted by Blazecock Pileon at 10:17 AM on September 8

Just wait until Goldman Sachs starts investing in organ banks.

First the magnetic monopoles, now this. Please keep Larry Niven out of Metafilter.
posted by GuyZero at 10:21 AM on September 8 [2 favorites]

Great. In the insurance business there's a general concept of "insurable interest". This means you can't buy life insurance for other people. For example, you can't sell Joe "Stars 'n' Bars" McPhearson a million dollar insurance policy that pays out on Barack Obama's death. It creates incentives society deems harmful. There's an entire field of anarchists constructing crazy ways to pull this off labeled Assassination Politics.

CDS's were exactly this, applied to corporations. I find it ironic to see assassination politics applied to investment banks and corporations by the investment banks themselves. In some cases, corporate issued bonds were insured for more than the issuer's market cap, effectively making them more valuable "dead" than alive. It's not hard to envision one or two clever guys causing a run on investment bank's short sighted reliance on overnight loans and profiting.

The difference between CDS and life settlement is apparently that you have to take the policy out yourself and contract with them. The question that arises is whether the payout is coercive.
posted by pwnguin at 10:29 AM on September 8

An aside on this sort of thing...with my credit union, for every loan I take (Line of Credit, Mortgage, loan for my ATV), I have to take out life and long-term disability insurance for the amount of the loan.

However, I started totalling these up and saw that I was paying a ridiculous amount for the attached premiums. Most of them are built into the payment I pay, but the mortgage is separate.

So, next week I meet with the bank to consolidate these into one policy to cover everything, hopefully at a much lower cost.
posted by Kickstart70 at 10:33 AM on September 8

Despite the negative framing of this post, I fail to see the great moral problem with this practice.


Well one problem, which you might think of as moral at this point, is this (from the linked blog):

It should be amply evident that Wall Street intends to recreate the conditions that existed in 2005. Virtually every element that created the real estate, commodities, and CDS bubbles will be replicated in the securitization of life insurance policies....

The question is do we want a repeat of the last 18 months or so? Tax-payer funded bailouts for the life insurance industry is a foreseeable result here. This exact finance strategy, when aimed at mortgages and debt, blew up the housing and lending industry because the holders of these securities stood to gain more if the homeowner foreclosed/GM went bankrupt/etc. Doesn't sound all that great to me...
posted by R_Nebblesworth at 10:35 AM on September 8

Kickstart, are you in a dangerous job, like king crab fishing or cartooning?
posted by Mister_A at 10:37 AM on September 8 [1 favorite]

Mister A: Nope, not at all. I sit behind a computer. I think the insurance on loans is ridiculous, personally.
posted by Kickstart70 at 10:38 AM on September 8

Yeah, that's crazy! Life insurance for an ATV loan? Ye gods.
posted by Mister_A at 10:42 AM on September 8

In defense of the insurance companies, I must inform you that a certain percentage of people die from the stress caused by high life insurance premiums.
posted by weapons-grade pandemonium at 10:47 AM on September 8

Dear Wall Street:

Have pillow, latex gloves, burglar's tools. Willing to travel. Discreet and professional. Call me!
posted by BitterOldPunk at 10:54 AM on September 8

burnmp3s: "But to me at least it seems like the insurance companies themselves would be in the best position to buy these policies, because it would save them the trouble of having to collect the premiums and pay out the benefits, and because they are in a good position to price them. The fund setup would only make sense if there's some reason that the insurance companies aren't willing to pay anything close to fair market value for a policy if the holder wants to cash it in."

This is my question, too. If there's an opportunity for profit here, it would seem like the life insurance companies could just step in, buy back the policies themselves, and tell the funds to go pound sand.

If the insurance companies aren't doing that, then there's probably some reason why: they might not think that risk/reward balance is right. Life insurance companies are (or were, anyway) notoriously conservative investors. They have to be: if they make bad investments with today's premiums, they go out of business when they have to start paying out those policies. Hence you used to see a lot of life insurance companies dealing in real estate; it was a good place to store and safely grow wealth over time, with little risk of catastrophic loss.

Unless the LI companies are just taking a wait-and-see approach—which is possible; they could just let the Wall Streeters go first and then, if there's money to be made, step in and cut them off at the knees—it might be that a life-insurance backed fund is a riskier investment than the LI companies want to get involved in, even with their intimate knowledge of the market. (Perhaps because of their intimate knowledge of the market?) It's possible that they've thought about buying back these policies themselves and decided against it, because it's not something they want to get mixed up in. That would be a pretty foreign attitude coming from a US financial-services or insurance company these days, but I don't think it can be ruled out. Not every insurance company is as stupidly run as AIG.

Unless the life insurance companies are legally prohibited from buying back policies, the fact that they're not doing it already and leaving it up to Wall Street would probably serve as a big red flag, if I was considering investing.
posted by Kadin2048 at 11:00 AM on September 8 [1 favorite]

I don't see how these derivatives will increase insurance premiums, honestly. Will someone explain?
posted by Mister_A at 11:01 AM on September 8

"there isn't a supervillan under NYC planning to thwart cancer research so he can profit..."

Well, no. Not under New York City, no. Washington D.C. on the other hand...

I would not argue that folks who are dying be given some comfort, clearly, something for that can be set up, I'd rather see it come from the grassroots side. Y'know, folks asking for something as a service from their insurance company. Not a problem there.
Given the history, I'm a little gunshy when it comes from the business end.
posted by Smedleyman at 11:24 AM on September 8

Congress could, at a stroke, kill their golden goose.

Unfortunately, Congress has gotten quite good at stroking big business.
posted by blue_beetle at 11:40 AM on September 8 [1 favorite]

I don't see how these derivatives will increase insurance premiums, honestly. Will someone explain?

Disclosure: I work for an insurance company, but I am not an actuary. Basically, there are all sorts of data that is used to price your insurance policy... this includes information about your health, life expectancy, etc., but also includes the non-zero chance that you will let your policy lapse as you get older, either because you decide you don't need it anymore (kids all went to school and became doctors) or you just can't pay it anymore. All of this is used to determine a price low enough for you to afford, but high enough for the insurance company to make money.

If you sell your insurance policy, the investors will damn well make sure they pay your premium, thus skewing one of the pieces of data used to set your premium. That's not a huge deal as long as the numbers stay low, but as we saw with securitized mortgages, the giant pots of money offered by Wall Street can increase the demand for the underlying transactions.

If you read the 2006 article, it's not just people getting sick selling -- 70-year-olds are being recruited to take out policies for the express purpose of selling them. Just as the ratings agencies assume that mortgages were for people who wanted to buy a house and had a long-term interest in them, life insurance companies aren't pricing pure speculation into their models. If they do, prices will go up for everybody.
posted by snickerdoodle at 11:52 AM on September 8 [11 favorites]

Thanks, snickerdoodle, for a very clear explanation.
posted by Mister_A at 12:07 PM on September 8

NOW can we hoist the black flag and commence with the throat slitting?

I've been sharpening this thing so long it's practically transparent.
posted by rokusan at 12:29 PM on September 8 [1 favorite]

reminds me of the story of a guy who wanted an apartment so bad (Paris or NY, i can't remember) that he bought an option from the old lady that owned it, and as part of the agreement he would pay her rent. I think he did this when she was in he 80's, she is now over 100 years old, and he is still paying.
posted by Gungho at 12:31 PM on September 8

The point of life insurance isn't to guarantee a large inheritance to survivors, but to minimize the financial hardships that your death might cause on dependents.

Really? Apparently I've been doing it wrong, then.
posted by jokeefe at 12:59 PM on September 8

They better have very good anonymization of the underlying people these policies are on. Otherwise, they could be incentivizing murder. (Your share price dropping? Just bump off a few people to keep this quarter's profit margin up.)
posted by fings at 1:12 PM on September 8

Gungho: A 120-Year Lease on Life Outlasts Apartment Heir.
posted by fings at 1:16 PM on September 8 [3 favorites]

The point of life insurance isn't to guarantee a large inheritance to survivors, but to minimize the financial hardships that your death might cause on dependents.

No, that's the sales pitch. Life insurance is an investment vehicle.
posted by rokusan at 1:26 PM on September 8

Someone actually said, "hey, bundling mortgages is a no-go - what else could we bundle that would make us a mint without having to actually do anything?"

Bundling mortgages allowed and encouraged mortgage brokers to prowl sub-prime markets (read "poor people") and make increasingly horrifying agreements to folks unable to afford anything else, knowing that they could pocket the commission and pass the risk onto investors.

Imagine the feeding frenzy on this one - insurance brokers will be circling hospices, using scare tactics and "creative pricing" to sell ridiculous life insurance policies to folks. Healthcare providers, looking to maximize their ROI because they've included such bundles as part of their investment portfolios, increasingly deny care to terminally ill patients.

You thought the healthcare and insurance industry was morbid now. Just wait.
posted by FormlessOne at 1:44 PM on September 8

Thanks Flings. Good to hear the old lady beat the system.
posted by Gungho at 2:02 PM on September 8

The man's widow is still paying the dodecagenarian her monthly stipend. Her comment in the piece fings linked was something like, "Well, sometimes you cut a bad deal." I kinda like her.
posted by Mister_A at 2:19 PM on September 8 [1 favorite]

While it may seem a little overblown, you have to consider that this new market gives certain companies a massive financial incentive to ensure that certain people meet untimely deaths. And as some of our rabidly free-market mefites will tell you, financial incentives are very, very powerful things.
posted by Avenger at 2:54 PM on September 8

NOW can we hoist the black flag and commence with the throat slitting?

No. Never.
posted by Ironmouth at 3:08 PM on September 8

A recent ponzi scheme related to life settlements:

Both Madoff and Steinger financially ruined thousands of people after wrist slaps from the SEC. But Steinger couldn't have been nearly as effective a swindler as he was without access to AIDS patients who were willing to sell policies to Mutual Benefits. To get that access, Steinger simply started the largest AIDS clinic in Broward County — and that put him in charge of millions of Medicaid dollars....

Investigators discovered that Steinger was pulling "regular" consulting fees not only from Mutual Benefits but also more than $250,000 from Commcare Pharmacy....

He told investigators that Steinger personally ordered doctors to prescribe certain drugs whether the patients needed them or not, according to state records.

One doctor who worked at the clinic and pharmacy, Ginge Brien, told investigators that he believed that too many patients were getting a certain intravenous medication called IVIg and took some of them off the treatment. "After removing the patients he stated he was taken to lunch by Joel and Steven Steiner," investigators wrote in a report. "During the lunch Brien was told by Joel that he needed to prescribe IVIg as it made them money."

So basically, they got into the business of finding AIDS patients, and milking their life insurance. So yes, there are people willing to meddle in the lives of their clients for profit.
posted by pwnguin at 6:21 PM on September 8 [1 favorite]

Yeah, that's crazy! Life insurance for an ATV loan? Ye gods.

Hey, those things are damn dangerous.
posted by fourcheesemac at 7:05 PM on September 8