Whatever the name it’s given for a particular situation, death bonds, viaticals, investor owned life insurance, life settlement…..it all comes down to a large step away from what life insurance ought to be, and a blemish on the integrity of the life insurance business that may cause a ripple effect that will hurt the industry and the consumers.
A few examples might help you to understand. In a life settlement a person takes out a term insurance policy for $500,000 when they are in good health. Before the end of the term and the conversion period their health changes substantially for the worse. They can’t afford to renew the policy because of the higher price due to their age and health, so they sell it to a third party.
The third party, usually a large company, but more and more, small investors, then owns the policy and converts it to a policy that is guaranteed to outlive you. When you die they collect. Sounds like a good thing for you right? At least you got something back out of the policy. I’ll come back to that in a minute.
Then there is investor owned life insurance. People actually take out life insurance for the express purpose of selling the policy. This is a little trickier, because they purchase the policy in good health and sell it while they are still healthy. The investor is truly speculating on your death. While a rather lengthy article, the whole idea of speculating on someone else’s death is well covered in a Business Week article from late July.
The problem I have with the whole scenario, no matter what the circumstance, is that there has never been a mortality study done on this type of policy. The insurance business is based on mortality tables and they have let this practice slip through without a review.
Please bear with my assumptions, but I am assuming that everyone reading this is human, and we all have some understanding of human nature. Take this as an example. The numbers are big, but when it comes to investor owned life insurance, this is a small deal. A businessman has a $5,000,000 term policy that he took out in the prime of his life. Got the best rates. Now he’s 70 and in poor health. A bout with cancer and a heart attack. He decides his family is well off enough, that when he is offered $500,000 cash for his policy, well, why not. So he sells the policy. The new owner converts the policy to a permanent policy with a premium of $240,000 a year. Well, the former business owner gets his second wind, and keeps on ticking. Meanwhile the investor is getting in deeper and deeper $240,000 at a time.
One year the premium comes due and the investor is short, and frankly is starting to think it was a bad idea. Human nature! Is he going to scrape and borrow another $240k hoping the old guy dies in the next year, when for $5000 he could probably find someone that would ensure that he collects $5,000,000. Sounds crass? Seems like a reasonable possibility given human nature.
Bottom line. I just don’t like the idea of a stranger owning a life insurance policy on me, my family, friends, or anyone else.