Investors profit in strangers’ deaths
Regulators are poking into an unusual and fast-growing corner of the life-insurance world in which investors can profit when complete strangers die.The business involves individuals selling the right to death benefits from their life-insurance policies – often $1 million or more – to investors. In exchange, individuals get cash while they’re still alive.The practice cropped up in the 1990s, mainly among AIDS patients with big medical bills. Those deals, which also involved other terminal illnesses, were called viatical settlements. Now there’s a much more widespread market, known as life settlements, involving a widening swath of relatively healthy, typically elderly, Americans.
A 2005 report by Sanford C. Bernstein & Co. estimated $13 billion worth of life-insurance policies had been sold by policyholders to life-settlement investors, a small subset of a $9 trillion industry, but up from $200 million in 1998. The number could reach $160 billion in the years ahead, according to the study.This represents a potentially important shift in how life-insurance policies are used. Regulators are wrestling with whether this pushes life insurance from its traditional role – providing benefits to loved ones after a breadwinner dies – into a speculative investment product. The presence of a new class of speculators could transform the business and lead to unforeseen consequences. For instance, it could force insurers to raise the price of insuring the millions who use policies the old-fashioned way.A primary concern is a subset of life settlements known as nonrecourse premium financing. In typical deals, outside investors play an active role in courting new policyholders, lending them the money to purchase the policies. After a couple of years of coverage, the individuals then can turn over the policies – and the obligation to pay the premiums – to investors in exchange for retiring the loans.Robert Henrikson, chief executive of MetLife Inc., says some people might buy policies just to sell them to investors, something that would be “a perversion of what life insurance is about.”Meantime, life insurers have lots at stake financially. When they write policies, they often assume some will lapse and they won’t have to pay claims against them. When investors buy these policies, that becomes less likely to happen, potentially putting insurers on the hook for bigger payouts.Most major life insurers have issued internal memos essentially banning agents from selling investor-backed policies that are intended to be sold after two years. Some insurers also ask customers during the application process whether they intend to sell their policies.Typically, consumers have had a few choices for life-insurance policies they might not want anymore: Let them lapse or return them to an insurance company in exchange for a relatively small payment.”All we’re doing is paying you more for an asset than the insurance company is willing to pay,” said James Terlizzi, chief executive of Peach Holdings Inc., a Boynton Beach, Fla., finance company that purchases assets like life-insurance policies and winning lottery tickets in exchange for up-front cash.Vail, Colorado
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