Outside the Box: Death Speculation on Senior Citizens Becoming More Popular
February 27, 2008
Across the country a strange new wave of investors are targeting senior citizens by purchasing high-end life insurance policies for them. The investors are offering to buy policies for older Americans and then pay their premiums. It is creating another sector of the life insurance world that focuses on buying, selling and generating profits from life insurance products.
Typically, the way the offer works is that the senior citizen is offered a loan to purchase a life insurance policy and then the investor offers to pay the premiums. After a specified time period goes by—usually 2 to 3 years—the senior citizen would then sign over their death benefits for a lump sum payment, which is far less than the death benefit, of course.
For example, a senior citizen is approached by an investor who offers to buy the senior a $1 million life insurance policy, and the investor would pay the premiums. At the end of 2 years, the death benefits would be signed over to the investor for a lump sum of $100,000. Many seniors are responding to this offer, hoping to fatten their bank accounts down the road. In fact, it has spawned a new industry often referred to as life-settlement.
It does have its share of critics, though, as they point out the possible dangers of selling life insurance policies to someone the senior has never have met before. Nothing like the warm and fuzzy feeling a person can get when a shady unknown investor is out there who can profit from their death. In addition, you have life insurance companies all up in arms because the whole deal is adversely impacting their profit margins.
Despite the complaints, this new business model of investing in people’s lives and collecting on their deaths continues to expand across the country. In fact, because investors have started to pool these investments and sell them as a package, these securities quickly attracted hedge funds, pension funds and other financial institutions. For instance, heavyweights like Goldman Sachs, Bear Sterns and even Warren Buffet are supporters of this method of investing.
This has led to an abundance of legal battles and discussions in several states over these new security offerings as they are currently very unregulated. According to California committee Chairman Michael Machado, state regulation is long overdue. He says that persuading seniors with offers of free cash to allow the purchase of life insurance on their lives for the benefit of third-party investors is wrong.
To illustrate just how this new investment product has exploded, consider that the total face value of policies purchased for the secondary market rose to $6.1 billion in 2006 from $2 billion in 2002, according to Conning Research and Consulting of Hartford, Connecticut. Market analysts predict that the total market volume could hit $20 billion this year. This particularly investment segment is literally on fire.
It is important to keep in mind that consumers are not allowed to purchase an unlimited amount of life insurance coverage. Insurers set limits on the coverage a policyholder can purchase. This amount changes from company to company and is based primarily on the person''s net worth.
This has led detractors of these securities to warn that consumers who sell too much of their coverage to investors might not be allowed to buy more insurance if they need it sometime down the road. In addition, many lawmakers feel that these investments also exploit seniors, siphon off money from their estates and expose policyholders to the possibility of fraud.
Politicians are starting to feel even more heat to regulate this market as more stories come out about abuses. Take, for instance, the case in Los Angeles where federal prosecutors indicted a couple of men for allegedly getting investors to finance the purchase of stranger-originated policies for thousands of members of an African American church. According to the indictment, the accused pocketed most of the proceeds instead of buying insurance.
Going forward, you can bet that life insurance companies and life settlement investors are preparing for intense legal battles across the nation, particularly in California. The insurance industry is a powerful political force and a large contributor to politicians'' campaign funds, making these legal wars extremely interesting to monitor over the course of the year.
Happy Trading.
Jeff Neal
Senior Writer, Options Strategist & Profit Strategies Radio Show Market Correspondent
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