The Financial Risk of Life Settlements

BANKS RUNNING WILD: THE SUBVERSION OF INSURANCE BY “LIFE SETTLEMENTS” AND CREDIT DEFAULT SWAPS by Marshall Aauerback and L. Randall Wray compares the negative impact on financial markets of life settlements with the recent experience from marketing credit default swaps.

Instead of making bets on the “death” of securities, this one will allow “investors” to gamble on the death of human beings. As the New York Times recently highlighted, the banks “plan to market ‘life settlements,’ buying 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, 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” (Anderson 2009). In effect, just as the sale of a CDS creates a vested interest in financial calamity, here the act of securitizing life insurance policies creates huge financial incentives in favor of personal calamity. In essence, the sooner you die, the bigger the payoff for the investor. And the corollary also applies, as the Times article notes: “If people live longer than expected, investors could get poor returns or even lose money.”

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