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Wall Street Pursues Profit in Bundles of Life Insurance (Death Bonds: Reaping Millions from dying)
New York Times ^ | 9/2009 | Jenny Anderson

Posted on 10/12/2009 7:11:04 AM PDT by SeekAndFind

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.

Either way, Wall Street would profit by pocketing sizable fees for creating the bonds, reselling them and subsequently trading them. But some who have studied life settlements warn that insurers might have to raise premiums in the short term if they end up having to pay out more death claims than they had anticipated.

The idea is still in the planning stages. But already “our phones have been ringing off the hook with inquiries,” says Kathleen Tillwitz, a senior vice president at DBRS, which gives risk ratings to investments and is reviewing nine proposals for life-insurance securitizations from private investors and financial firms, including Credit Suisse.

“We’re hoping to get a herd stampeding after the first offering,” said one investment banker not authorized to speak to the news media.

In the aftermath of the financial meltdown, exotic investments dreamed up by Wall Street got much of the blame.

(Excerpt) Read more at nytimes.com ...


TOPICS: Business/Economy; Culture/Society
KEYWORDS: death; deathbonds; dying; wallstreet
So let me see if I get this ---- Wall Street needs its hundreds of billions in paper profits. That's a given.

But since they've already destroyed everything else while plundering that wealth, now Wall Street is going to suck those profits directly out of our veins. According to the Times :

"[E]ven if a small fraction of policy holders do sell them, some in the industry predict the market could reach $500 billion. That would help Wall Street offset the loss of revenue from the collapse of the United States residential mortgage securities market, to $169 billion so far this year from a peak of $941 billion in 2005, according to Dealogic, a firm that tracks financial data."

What a swell idea -- not much different from securitizing mortgages. The theory is that it lowers the price of borrowing--without securitization, home mortgages would have been much more expensive, they say (ignoring of course how securitizing subprime loans destroyed the entire real estate market for millions upon millions of Americans).

Now in the case of securitizing life insurance payouts, the effect right away will be higher premiums on new life insurance policies.

Meaning securitization won't even pretend to lower premiums, but rather will put life insurance out of more Americans' reach before destroying the entire industry.

At least, that's what I think the long term effect will be...

What does everyone think ?

The barrons at Goldman Sachs are already leading this charge.

Goldman are so excited by all that juicy death that they've already invented a kind of death index "enabling investors to bet on whether people will live longer than expected or die sooner than planned." That is not a made-up quote, folks: that's straight out of The New York Times business section.

1 posted on 10/12/2009 7:11:06 AM PDT by SeekAndFind
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To: SeekAndFind
Now in the case of securitizing life insurance payouts, the effect right away will be higher premiums on new life insurance policies.

You should read the article again. That's not what it said.

2 posted on 10/12/2009 7:13:29 AM PDT by Toddsterpatriot (Math is hard. Harder if you're stupid.)
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To: SeekAndFind
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.

This is a sure sign that these insurance companies want Obamacare to pass. They are banking on people dying sooner under Obamacare.

3 posted on 10/12/2009 7:13:50 AM PDT by raybbr (It's going to get a lot worse now that the anchor babies are voting!)
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To: SeekAndFind

Clearly wall st needs much more regulation, we just can’t trust these idiots in the playground.


4 posted on 10/12/2009 7:14:04 AM PDT by DonaldC (A nation cannot stand in the absence of religious principle.)
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To: SeekAndFind

There are companies doing this now that are very responsible. The people do not have to sell their life insurance. It is optional and gives them an opportunity to make money versus letting policy lapse. Credit Suisse and a few others are in this business. Buffett recently entered. Buffet and Goldman are stinking vultures.


5 posted on 10/12/2009 7:15:32 AM PDT by Frantzie (Do we want ACORN running America's health care?)
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To: raybbr
This is a sure sign that these insurance companies want Obamacare to pass.

here's a very important question --- is Wall Street simply re-acting pro-actively to what they see has the inevitable trend in the USA ? Or are they ACTIVELY pushing for this in order for their financial instruments to profit ?

A lot of conservatives of the Cato Institute variety claim that Wall Street is simply being REACTIVE. After what Henry Paulson, Larry Summers, Robert Rubin and Tim Geithner did and seeing their close relationships with such Wall Street firms as Goldman Sachs, I am not so sure anymore.
6 posted on 10/12/2009 7:17:09 AM PDT by SeekAndFind (wH)
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To: SeekAndFind
I assume this is for paid up whole life policies. Not for term insurance...
7 posted on 10/12/2009 7:17:10 AM PDT by Eric in the Ozarks
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To: Frantzie

Let’s see how this works ....

Life insurance is a close to trillion industry. And of those trillions in life insurance policies, there is always a certain percentage of policy holders who are facing imminent death. Not the kinds of deaths we all hope for — quick, painless, unforeseen—but the more common kind: the slow, painful, devastating deaths by any number of ailments — late-stage diabetes, lung cancer, devastating stroke, liver failure — deaths that bankrupt you and your family as you wage a losing struggle with your health insurance company from your death bed to get your pain medication restored or your hospice care nurse partially covered.

You desperately search for a new source of money wherever it can be found — VOILA, there it is -— there’s a budding industry out there who make their living by snatching up a terminally-ill policy holder’s insurance for a discount.

They then offer the desperate, dying holder that needed cash up-front, waits for the person to die, then cashes in on the full value of the policy.

The quicker the death, the faster they make money.

Now if you’re going to have every Wall Street bank hungry for “life settlements” to package and securitize, you’re going to need a lot of brokers to trawl the nursing homes, hospice centers and hospitals for “products” (AKA dying Americans ).

Much more than we have now (just as the number of mortgage brokers exploded when Wall Street needed mortgages for their securitized products).

These brokers will try to get to the dying American before his life insurance company does, or someone else — and offer them a better cash settlement for the policy than the insurance company might offer.

Everyone sees that dying policy-holder as a source of profit — but only if that person dies as soon as possible after you snatch up the policy.

WE HAVE A NEW AND BUDDING INDUSTRY HERE FOLKS — One that is tied intimately to health care.

For Actuaries, the other part is calculating as accurately as possible the risk of the products. Now remember, the quicker the policy-holder dies, the bigger the profit. Because the biggest threat to investor profits is having these policy holders living longer than expected. As the Times article noted, such a thing has happened before:

“[T]here is another potential risk for investors: that some people could live far longer than expected.”


8 posted on 10/12/2009 7:25:58 AM PDT by SeekAndFind (wH)
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To: Toddsterpatriot
You should read the article again. That's not what it said.

So, you actually believe that the net effect of this financial instruments is to LOWER overall premiums ?
9 posted on 10/12/2009 7:44:07 AM PDT by SeekAndFind (wH)
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To: SeekAndFind

The industry has been around for at least 2 deacdes. The majority of life insurance (85% or so) lapses and the people often get nothing. This is not really targeted for people who are on their deathbed.

It is generally seniors who have bigger polocies of $1 million or more. A $3 million policy probably has yearly premium of $80,000 a year. A lot of older people can no longer afford them. The other option is letting them lapse and maybe get some cash value which may be 5% or less. Most lapse and the people get essentially nothing.

No one has to sell. People can keep paying the premiums. Sort of like people can pay for their mortgages unless they are in ACORN or want to try to blame the greedy banks for them taking out a mortgage they could not afford.

So far it is a pretty honorable industry. Credit Suisse was one of the few investment banks involved. The addition of Goldman, Wall Street and Buffett will ruin it.


10 posted on 10/12/2009 7:44:24 AM PDT by Frantzie (Do we want ACORN running America's health care?)
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To: SeekAndFind
Life insurance premiums have actually gone down due to competition and longer life expectencies. This is particularly true with term insurance. It is pretty cheap for what you get. If the price gets too hiugh - people will not buy. The insurance companies and life settlement industry have done a pretty good job. The scum on wall street like GS getting may be a big mistake.
11 posted on 10/12/2009 7:48:28 AM PDT by Frantzie (Do we want ACORN running America's health care?)
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To: DonaldC
Clearly wall st needs much more regulation, we just can’t trust these idiots in the playground.

The question is, "Who is going to watch the watchers?"

12 posted on 10/12/2009 7:50:47 AM PDT by dfwgator
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To: SeekAndFind

No.


13 posted on 10/12/2009 7:50:59 AM PDT by Toddsterpatriot (Math is hard. Harder if you're stupid.)
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To: SeekAndFind

What it will mean is that the wheels of murder-of-the-elderly will be well lubricated.


14 posted on 10/12/2009 7:54:27 AM PDT by bvw
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To: SeekAndFind

The elder-care facilities will turn into death camps.


15 posted on 10/12/2009 7:55:59 AM PDT by bvw
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To: SeekAndFind

The “bundling” part may be new but buying other peoples existing policies as an investment has been around for a long time.


16 posted on 10/12/2009 7:59:50 AM PDT by Graybeard58 ( Selah.)
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To: bvw
The elder-care facilities will turn into death camps.

Just like a lot of these financial instruments, there is an element of gambling here. They are in essence "betting" that those who sell their policies will not live as long as they expect. These gamblers aren't going to be targeting the healthy elderly but the sickly ones, hoping that the disease gets them soon enough before the target date expires.

How's this different from going to a casino ?
17 posted on 10/12/2009 8:10:48 AM PDT by SeekAndFind (wH)
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To: Graybeard58
The “bundling” part may be new but buying other peoples existing policies as an investment has been around for a long time.

Doesn't this sound eerily similar to Mortgage backed securities ?
18 posted on 10/12/2009 8:11:43 AM PDT by SeekAndFind (wH)
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To: SeekAndFind

How is it different? Casinos don’t want their dealers or players to die. In this case we’d have a huge financial incentive to encourage death. And the desired outcomes are more “reachable”. Because these kind of contracts fall within what are called “death contracts” they may already be illegal under law — I’m guessing.

But if they are not already illegal, they should be.


19 posted on 10/12/2009 9:29:29 AM PDT by bvw
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To: SeekAndFind

Related article that covers legal issues involving life insurance as an incentive to murder:

http://www.rivkinradler.com/rivkinradler/Publications/newformat/200212tolle.shtml


20 posted on 10/12/2009 9:32:41 AM PDT by bvw
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