Your Life Insurance Policy on the Stock Market

Today's rant is about a post in the NY Times - none other than Jenny Anderson. But while I normally take this spot to rant about the journalist's lack of understanding or misleading language that seems so pervasive in the financial media, she does a pretty good job. Maybe if you are thinking about subscribing to a paper, you should consider them.

Let's get two things straight first:
1. I'm sort of a fan of life settlements. It gives policyholders an extra way to access the value they have in the policy and the value of their own insurability without relying solely on the insurance company. Life settlements are sort of a creative way to stick it to the man. More power to the individuals who can sell their policies for more than the cash value.

2. The slippery slope argument is one of the great argumentative fallacies - meaning while many people might believe it or use it in an argument, it is not always true.

However, in this case, the slippery slope seems to becoming a reality.

Life settlements can be very good things for policy owners, but they should be careful who they sell their policies to. The best choices are usually institutional investors like pension funds and so on. So what would happen if those investors wanted to bundle them and sell them off to other investors?

Well, they would have to create the groups or tranches of the different policies, buy bonds as a way of supporting the value or lowering the risk to those investors and so on. If this sounds like what happened in the mortgage industry a couple years back, you would be correct.

Not only are there questionable moral problems with this type of strategy and the real value of securitization is questionable, but the long term affect for you and me is higher life insurance premiums for everyone down the road. See, when life insurance companies issue policies, they expect a certain number of them will be canceled before the policy owner dies. But if more life policy owners held on to the policies, the life insurance companies would have to set aside more money to pay off those future claims. That extra money comes from the future life insurance premiums you and I pay.

There just isn't a way for that system to work. Eventually, it will be over valued, future premiums will increase, requiring more and more capital to make the machine go, which will cause the bubble to pop. Granted, I think the bubble would take a long time to pop because of the nature of our life expectancy. But this is not a sustainable model. More importantly, it does not offer any real attainable value. It only shifts the value temporarily with a long term negative affect.

My solution would be to let policy owners sell their policies back to the life insurance companies themselves. If life insurance companies competed for old policies the same way new investors do, many people would take a low-ball offer from them over another source any day - solving our problem. What do you think?