Insurers Warn: Don't Let Wall Street Take Your Life ... Policy
It's no secret that life insurers hate "life settlements," the practice of selling your life insurance policy to a broker who pays you more in cash than the policy is currently worth and gets you out from under those
payments.
Insurers lose in this game because even though the average person might let the policy lapse, the broker never does. And upon your death they're paid the full amount, skewing the actuarial tables and costing insurers money.
Life insurers have tried to choke off this market. First, by getting states like Illinois to ban or limit it, and then by railing against the evils of having an aged or possibly mentally disabled person sell their life insurance policy to a total stranger who benefits only when the policyholder dies. Neither has really worked, and the life settlements market - even in a recession - has proven resilient.
Now a heavyweight lobbying group, the American Council of Life Insurers, has a new tactic. It is asking federal and state policymakers to ban the practice of "securitizing" life settlements.
Securitization works the same way for insurance policies as it does for mortgages, subprime or otherwise. When you write a mortgage it usually goes into a pool with other mortgages. Then it is sold to a Wall Street investment bank, hedge fund or private equity that collects on it as the participants pay off their mortgages or, in the case of life settlements, die.
No one needs reminding about just how wrong Wall Street was on the mortgage market. The New York Times suggests that securitizing life settlements could be "new wine in old bottles," or another attempt by rapacious firms to capitalize on a market that will ultimately fall apart, leaving everyone, except Wall Street executives, even poorer.
That theory suits insurers. They claim that in order to make a multi-billion-dollar market out of life settlements, brokers not only go out and solicit seniors with life insurance policies, but also pay for cruises and dinners to encourage the aged to buy these policies and then resell them to the brokers. This practice, known as STOLI - no relation to the vodka - is now illegal in 28 states.
The problem: insurers may be trying to shut the barn door when the horse has already escaped. According to the Economist, a thriving $7 billion market for life settlements already exists, and is backed by heavyweights like Deutsche Bank and Credit Suisse. Risk takers love this market because - theoretically - there's no correlation between the ups and downs of the financial markets and the rate at which older people die.