Wall street investors preying on the weak and elderly?

Wall Street bankers and hedge funds are getting into the game of “betting on mortality” now. They are buying up life settlements, bundling them, as they do mortgage loans, and selling them to other investors.

With life settlements, the investors continue to pay the premium on the life insurance policy until the original insured passes away. Then the investor cashes in on the full face value of the policy, profiting on the bet that was made on this person’s mortality.

This is a very morbid business. Basically investors are “making bets “on how soon the original policy holder will die. The sooner that person dies, the more money the investor will make.

Life settlements first appeared during the AIDS crisis during the 1980s. Investors bought the life insurance policies of AIDs victims, certain they would die within a few years. The AIDS victims received immediate cash to help defray medical costs and to improve their life quality. The investors were certain to make huge profits on their investments in a short period of time.

For AIDS life settlement investors, everything went all wrong as AIDs patients began to live longer. Many investors lost their investments, and ultimately these policies were allowed to lapse, as the patients were outliving the investment.

There are some huge issues with the practice of bundling life settlements, especially if banks and hedge funds become involved in “betting on mortality.”

If Wall Street suddenly gets into the business of bundling life settlements, will this cause shady insurance agents to start preying on the sick and elderly to sell policies, with the sales pitch that these people can quickly sell the policies for cash?

This practice has been around for a while, but if it suddenly becomes very lucrative, will it become worse?

Will potential investors know anything about the people these policies have been written on? For instance, is there any way for an investor to know that the original insured was actually an 85 year old man with terminal cancer? If so, is this an invasion of privacy?

We all know the life insurance business is in fact a business of betting on the “mortality” of the insured. It is already a multi-trillion dollar business for insurance companies. As such, it is regulated.

However, if banks and hedge funds become involved, who will be in charge of regulating this portion of the business?

Who will be checking that unscrupulous insurance agents, and perhaps new insurance companies, will in fact be selling legitimate life insurance policies?

The potential for scams becomes exponential. In a worst case scenario, do we have to be concerned about another Bernie Madoff type of ponzi scheme in the life insurance and life settlement businesses?

Resource:
Wall Street takes a gamble on life insurance settlements ABC news

Written by Shelby Bateson