The big ugly business of deathFebruary 14, 2011: 12:17 PM ET
If you are alive, you will not have your life insurance to spend; if you have it to spend, you aren't alive. This is a dilemma that only an investment banker can solve.
By Moshe Silver, Hedgeye
The baby boomers represent a great marketing opportunity – and hence a tremendous investment opportunity. One could have become very rich over the past six decades – and very predictably so – by investing successively in companies in the business of layettes, then diapers, then toddler shoes, school supplies, summer camp equipment, college anything… on to health clubs, plastic surgery, medical clinics and finally, hospice. So it shouldn't be so surprising then, with the boomers now in their 60s, the business of death would eventually emerge as a major investment theme.
Wall Street's death benefit securitization program – the cousin to its ill-fated mortgage securitization program -- has not been well received by the media but individuals have flocked to it. In fact, the Wall Street Journal reported recently that investors bought $12 billion in life third-party insurance policies in 2008.
But they're getting duped by bankers once again. The Journal tells of one Bruce Porter, an 81-year old rushed to the hospital when he thought he was having a heart attack. As he lay recuperating (it was not a heart attack) he was visited by his insurance agent who said his failing health was good news, as it now made his $6 million life insurance policy very marketable. Mr. Porter had purchased the policy with the express purpose of selling it to an investor – not a particular investor, just one of the purported army of savvy folks with open checkbooks looking to cash in on the ultimate Sure Thing.
Alas, Mr. Porter's health improved. Rather than find a buyer for his policy, Porter ended up having to pay overdue premiums of $25,000 a month and is on the hook for a personally guaranteed $650,000 bank loan that secures the policy. He is now suing the insurance agent, alleging that he was misled about the policy and its marketability.
We're not sure who is the greater ass in this sorry tale. First, there is the society that so pathetically undervalues the lives of its members that it seeks to turn their demise into a trade. As to insurance regulation – which is handled state by state – if a person cannot buy life insurance on another without a legitimate insurable interest, is buying insurance on oneself with the intent to flip it not inherently fraudulent?
It seems that Mr. Porter is, himself, principally to blame for rushing to cash in on his own death, and the story says a wave of older folks, all in better than expected health, are suing the insurance companies, agents and banks involved in their failed investment in life insurance policies.
Here's the Catch-22 of life insurance: if you are alive, you will not have it to spend; if you have it to spend, you aren't alive. This is a dilemma that only an investment banker can solve.
Capitalizing on desperation
This market originated in the tragic needs of the terminally ill whose resources have run out. Often the only way they can spend their last days in some modicum of dignity – and not run through their family's savings – is to sell their life insurance policy in what is called a viatical settlement.
The premium on a term policy for an 80-year old is far above that for a 30-year old, and the attendant commissions to the agent much higher, but we wonder whether these policies distort the insured base in ways that disadvantage other policyholders. Whatever the benefits to the insurance industry, this business may be held up as a paradigm for the way improper speculation skews market dynamics. Finally, we are baffled that this is not banned in all fifty states.
One can make a case for speculators taking the other side of legitimate hedgers' transactions – contracts on such commodities as sugar, cotton and soybeans would not be viable in many cases if not for the lubricant of speculative money. The first question that market economists and regulators must ask is, what is the natural level of prices and liquidity, and how much is this distorted by speculation? The life insurance industry may provide a clear-cut laboratory for viewing the effects of improper speculation – that is, speculation where there is no legitimate other side of the trade.
Bruce Porter had no legitimate interest in insuring his own life. His only purpose was to flip his policy to an investor. This is like people who bought multiple condos during the housing bubble. As with the foreclosed units now clogging the market, these toxic life insurance policies are the equivalent of properties whose owners never intended to live in them: their entire economic value rests on froth.
Curiously, selling death benefits produces the only securities investment that comes with a guaranty: the seller will die. But many who took out expensive policies on their own life are discovering that, even in a trade with a guaranteed outcome, price matters.