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.
My 20 years of experience give me the knowledge and leverage to find reasonably-priced life insurance for people who have been declined or are paying more than they need to.
This example is ludicrous, given the current state of how life settlements really work. What has been described is an old viatical. The way the life settlements are packaged in the ABS market, and sold within a pool of hundreds, or even thousands of other policies, this example is irrelevant.
Insurance companies have already taken measures to prevent what is described in this example. Not only have most of them increased their premiums on older insureds (read the annual report of any of the insurance companies) they have also added a question on the application: “Do you intend to sell this policy?”
If life settlements are used properly, they allow consumers (owners of current policies) a better alternative to cashing in the policies with the insurance companies for the lower cash surrender value. The insurance companies have been making out like bandits for years, by counting on policies lapsing, and/or paying out a much lower cash surrender value. Now that the insurance companies see that life settlements are not going away, they are getting involved on the purchase side by buying either the policies through a subsidiary life settlement funder, or by buying the ABSs created and sold in the market.
Granted, there are going to be abuses, such as those in the Business week article “Death Bonds”, just as there are abuses in the securities markets. However, if read closely enough, one would have seen that even that sensationalistic article mentioned the fact that there is nothing wrong with life settlements. It’s the abuses that are the main concern.
Agreed, INVESTOR-INITIATED life insurance is bad for everyone, accept the investors. It’s bad for the insurance company; it could be bad for the insured; it could cause the cost of insurance to go up; and it could ultimately threaten the tax-free status life insurance currently enjoys. Yes, these abusive programs should be stopped. But, an insured should not be limited to his/her options when it comes to the disposition of their own policies.
Brian,
I appreciate your comments. The examples that you take exception to are mine and the reason that my customers will not be offered a product through my office that has the potential for abuse.
I don’t sell UL’s that are not guaranteed. I abhor VUL’s. And I think the life settlement market is not safe and not well thought out.
Life insurance companies are very split on this subject. Some allow it and others will pull your appointment if you are found to be participating. There are more each day joining the second group and I am not seeing a movement of any size toward the first group.