Yet the industry continues to thrive, and, despite all the speed bumps that opponents put in the road, is likely to grow. The Executive Director of the Life Insurance Settlement Association, Doug Head tells National Underwriter that it "did well in the face of adverse publicity last year (in addition to facing the recession)," and will see a "return of buyers" in 2010.
What is a life settlement? A policy, usually bought later in life, to help manage taxes and estate planning. It generally requires a monthly payment to the insurer. Should you decide that you don't need the policy anymore a broker buys it, giving you more than originally paid. The broker then sells the policy, effectively selling the worth of your life, to an investment bank or hedge fund, which picks up the monthly tab and pays it until you die.
Is everybody happy? Well, almost everybody.
The senior citizen gets cash, the broker gets a commission, and the investment bank knows that when you die, the insurance company has to pay the full value of the policy. But insurers don't like it because they're relying on a large percentage of people who purchase these policies not to hold on to them until they die. However, investment banks always do.
Other detractors see this as a ticking time bomb for banks. If their timetables are off, and people live too long, the banks could lose money. And some say the fact that a large financial institution is hovering - and hoping - that you will die soon is a perversion of life insurance.
But there are warning signs. One is a report from the General Accounting Office due in April that will, hopefully, shed new light on the industry. The report was commissioned by Wisconsin Sen. Herb Kohl, who heads the Special Committee on Aging. The Securities and Exchange Commission has also opened an internal inquiry.
And Illinois Gov. Pat Quinn has outright banned one particularly nasty form of this practice known as "Stoli" or "Stranger Owned Life Insurance," where brokers solicit seniors as "straw men" to buy these policies and then take control of the policies themselves. Other states may follow suit.