09/08/09 Baltimore, Maryland
Since it worked so well the first time around, Wall Street has spawned a new age of securitization — instead of mortgages, this time it’s life insurance policies. Before we spit on this one, here’s how it works:
- A senior with a high-premium life insurance policy, for one reason or another, choses to cash out
- Instead of taking a “cash surrender” directly from the insurance company, the old fella sells his policy to a “life settlement company”
- That company pays him a larger amount than the “cash surrender” would pay, but not nearly the totality of the policy’s value.
- The company keeps paying the premiums. When he kicks the bucket, the company collects the insurance policy.
That’s where the story would normally be over. But now, just like pools of subprime, Alt-A and prime mortgages, investment bankers are crafting securitized pools of these insurance polices. Basically, they pool together a bunch of beneficiaries that will likely die around the same time, buy up their policies from life settlement companies, package them into securities and sell them to investors around the world.
Heh. Really, could the idea of “Wall Street” be any more evil right now? Not only are they rehashing the same schemes that triggered the credit crisis in the first place, but think about it… they will make more money the sooner you die! If policyholders die sooner than expected, there will be no monthly premiums left to pay and the investors get a bigger share of the insurance payout. (And if people like our tech analyst Patrick Cox are right, a sudden surge in life expectancies could blow up these new funds… another crisis! Hooray!)
It’s no wonder Michael Moore has set his sights on lower Manhattan… we couldn’t think of an easier target. They deserve each other.
Ian Mathias
Ian Mathias is the managing editor of Agora Financial’s Income Franchise, where he writes and researches about retirement, dividend and fixed income investing. Much of his work is featured in The Daily Reckoning and Lifetime Income Report – Agora Financial’s flagship income investing advisory.
Previously, Ian managed The 5 Min. Forecast, a fun, fast-paced daily look into the future of global markets and macroeconomics. He’s also worked in public relations, where media outlets like Forbes, AP, Yahoo! and MSN Money have syndicated his writing. If he’s not at work, you’ll probably find Ian on a bicycle, racing up and down the “mountains” of Baltimore County. Ian has a BA from Loyola University in Maryland.
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now i have yet another reason to hate wall street people….thank you…
Haha this is pretty interesting. I’m happy to see The Daily Reckoning reporting on this practice and exposing not only the detrimental and inevitable financial/economic effects, but also recognizing the inherently immoral and unethical aspects. Shouldn’t surprise me as that’s what The Daily Reckoning does and is why I love them so. Anyway…
I (very briefly) worked for a firm involved in this securitization process. I was the monkey responsible for the first audit of the paper work, shuffling forms, entering policies into the computer, etc. We were a middle man. See, the company would solicit wealthy and elderly people and offer our services. They would take out insurance policies and we would buy them or we would buy their already existing policies. Then we would split them into tranches and hopefully sell them off to other companies asap so we wouldn’t have to pay the premiums for long. But also, and this wasn’t given as a reason, because we didn’t want them to blow up in our face and/or take a chance on grandpa making a disasterous and unexpected recovery. I was (and still am) just your average moron but I remember how the entire process just didn’t make any sense to me. The mind was repelled as they say. Although the place was my source of income and was populated with a number of cute girls, I was quite happy when they fired me.
Of course an astute DR reader could do the math on his own life insurance take the money from the life settlement company and turn the cash into a greater amount by investing anywhere but Wall Street.Or could they ?
I wonder if we’ll see an uptick in un-explained deaths in older citizens that sign up for this scam.
It’s like signing your own death warrant. Since these companies are so unscrupulous as to underwrite these scams, what’s to stop them from forming death squads to go after seasoned citizens that don’t have living family members.
To bad the government didn’t think of this, it would give them a shield in their desire to thin the older animals in the herd before they have to pay out the medical expenses in the last six months of life.
I would be concerned for seniors with no family members that sign up for this along with reverse mortgages. A little carbon monoxide poisoning, maybe? A heart attack here or there? How many ways are there to kill a human without detection that would look like a natural death in a senior citizen?
Don’t want to sound morbid about it, but I wouldn’t trust anyone with my life at that age.
regarding an uptick in unexplained deaths in older people i would think that is what hillary care 2.0 is for including the provision for suicide…..
believe me, wall street + obama health care = unnatural death.
to be blunt, obama is delivering the infirm to the jackals of wall street…i do not exaggerate on the complicity of murder. this is what it is all about.
It’s not a scam.Ask the seniors who got 5 figure cheques if they feel scammed.But it could lead to abuse as the next in line for their investment to pay off become impatient .Initially everbody is pretty happy with their end of the deal just like the last bubble.
Hey idiot… nice article. Why don’t you quit your job, or even better, jump!
…”Basically, they pool together a bunch of beneficiaries that will likely die around the same time, buy up their policies from life settlement companies, package them into securities and sell them to investors around the world.”…
So let me get this straight… Wall Street is to “pool together a bunch of **beneficiaries** that will likely die around the same time”… are you kidding me?
Instead of trying to copy and paste someone else article, why don’t you try to understand what you’re talking about first… the “beneficiaries” are not the ones who will die; the “insureds” will die, then, the investors collect.
Only in America. Amererica with its unbriddled greed is somthing else. If this scheme causes another disaster I hope it takes down the entire United States once and for all. We here in europe are pooling our bets to see when the united states will end up like the former soviet union. Most people think around 2014. America is do divided, so corrupt, so frightened that it listens to fables and lies. Its just a matter of time and it will implode. To that We look forward to it. Then we can cash in on Americas demise.