Wednesday, September 09, 2009

And You Thought This Was a TV Drama Plot!

Deneen notes a proposed new financial product.

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.

"CSI Miami" (yes, it's a B-class lowbrow show) ran an episode which centered around a parlor game wherein players bet on the life-expectancy of various people. In the episode, a player enhanced their return-on-investment by guessed it.......murdering their 'pick.'

There's not much character to admire on Wall Street these days. They've kinda elevated the stakes, though, from stripping folks of their money to stripping their dignity in death.


Shoebox said...

There was an article a few weeks back about a similar product in Germany. It was based on US deaths. Problem is that no one is getting paid out because life expetancy keeps going up.

If they do start selling the product here, perhaps they could get Kervorkian to be the spokesperson?

Grim said...

I'm not exactly sure I understand the mechanism here. How exactly am I worth more if I die younger?

I get ill, so I sell my $1 million policy for $400,000. This is a good deal for the insurance company, as it saves them $600,000 over what is presumably a year or two. However, once they've made that payment, the game is over -- I can live another ten years, and they don't owe me anything else; neither do they recover any money.

What exactly are they selling?

Dad29 said...

You're selling the 'rights' to the proceeds. Think 'discount'

So while you get $400K, the party who owns your policy collects $1MM when you die.

Now it's a matter of ROI--time/value of money. The faster you go, the quicker the return ($600K) in investment.

Grim said...

Oh, I see. That makes sense: instead of selling my policy back to the insurance company, I'm selling you the right to collect for me when I die. You pay me more than the insurance company would give me. Then, if I die early, you get a nice fat return.