Wall Street Pursues New Financial Venture with Life Insurance

Posted in Life Insurance

September 14th, 2009

After the fiasco/failurelast year that resulted fromgetting involved in the mortgage business, Wall Street began looking for a new financial venture – it appears that it will be in life insurance. DBRS, a company that gives risk ratings to investments,reported last weekthat it is currentlyreviewing nine proposals for life-insurance securitizations from private investors and financial firms.

According to a recent NY Times article, those bankers involvedplan to buy life settlements, which are life insurance policies that ill and elderly people will sell for cash (ex. a policyholder might accept $400,000 for a $1 million policy). After these settlements are purchased, they plan to “securitize” them, which means they will package hundreds or thousands of them together into bonds then resell them to investors in aform similar to a big pension fund. The investors will thenreceive the payouts when people with the insurance become deceased.

The earlier the policyholder passes way, the bigger the return will be. On the other hand, if the policyholder lives longer than expected, the investor could receive a poor return, or even lose their money. The point is that Wall Street will profit either way because it gets to profit sizable fees for creating, reselling and trading the bonds.

As you can imagine, these financial transactions from higher-ups cannot occur without having some effect on the “little guys” – the insured. Some say that this “venture” could benefit policyholders because it will allow them to cash out their policies while they’re alive. However, those who have studied life settlements warn that insurers will likely have to raise premiums if they ultimately have to pay out more death claims than they anticipated.

What are your thoughts? Could this venture end like the mortgage scandal did last year?