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After the mortgage business imploded last year, Wall Street investment banks began searching for another big idea to make money. They think they may have found one.

The bankers plan to buy “life settlements,†life insurance policies that ill and elderly people sell for cash — $400,000 for a $1 million policy, say, depending on the life expectancy of the insured person. Then they plan to “securitize†these policies, in Wall Street jargon, by packaging hundreds or thousands together into bonds. They will then resell those bonds to investors, like big pension funds, who will receive the payouts when people with the insurance die.

The earlier the policyholder dies, the bigger the return — though if people live longer than expected, investors could get poor returns or even lose money.

“We’re hoping to get a herd stampeding after the first offering,†said one investment banker not authorized to speak to the news media.
Critics of life settlements believe “this defeats the idea of what life insurance is supposed to be,†said Steven Weisbart, senior vice president and chief economist for the Insurance Information Institute, a trade group. “It’s not an investment product, a gambling product.â€

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http://www.nytimes.com/2009/09/06/business...nted=1&_r=1

Edited by Britney's Piers

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Could someone informed help here. I understood that one had to have an interest in the preservation of something insured.

Selling an endowment is different because it is the investment element that is sold.

I cannot take out term life insurance on Gordon Brown because I have no vested interest in him being alive.

How can life insurance be sold to a party that has no interest in the person being alive?

p-o-p

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How can life insurance be sold to a party that has no interest in the person being alive?

There was a thread on here recently about wallmart insuring it's employees- they call it 'dead peasant insurance.' I suppose in their case it covers them against claims on the company health care plan.

In this case I suppose it will be derivitives of the insurance that will be traded, rather than the insurance directly. So it'll be comforting to know that in the event of your untimely demise, investors will be laughing all the way to the bank. :lol:

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Could someone informed help here. I understood that one had to have an interest in the preservation of something insured.

That's correct, which is why life settlements is all about buying an existing life insurance policy, not taking out a new one. In the US there's a rule that, after some period, possibly 3 years, the policy becomes 'uncontested'. This means that the company that sold it can no longer contest its validity, at this point, it can be sold on. There's a long standing business in life settlements where companies buy policies off terminally ill people (it was very popular with AIDS patients before HAART came along) so they can go and blow it all on hookers and crack cocaine or whatever, this is an extension of that.

The big problem with death derivatives, as I've always thought these should be called, is that they have the potential to put prices up for normal policy holders. Some large percentage of all life insurance policies lapse - that is, the policy holder just stops paying the premium for one reason or another. When a policy is sold to a financial institution however, it's guaranteed not to lapse - the new owner will continue to pay the premium until the old owner dies. This means that the lapse rate as a whole can fall and, since the income from lapsed policies subsidises non-lapsed ones, they inevitably cost more.

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There was a thread on here recently about wallmart insuring it's employees- they call it 'dead peasant insurance.' I suppose in their case it covers them against claims on the company health care plan.

You need to demonstrate that you have a valid financial interest in the person staying alive. I imagine that Walmart were just playing the lapse rate game (see my previous post) but there are legitimate reasons why a company might want to take out life insurance on a key employee for example (e.g. that company that funded the Jacko tour would, I imagine, have had quite a bit of life insurance on him if they could get it).

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yeah - it's basically like betting that life expectancy is about to fall sharply in the West.

No it's not. It's betting that you can stay liquid for longer than an average policy holder. Of course, there is the McDonald's bump to consider, but the insurance companies already have this in their life tables.

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