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Insurance As Death Roulette

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Betting on when old people will die is creepy.

It was also, until recently, big business.

And now, it seems, that everyone who participated in this morally repulsive game is suing everyone else.

Basically, life insurance policies are intended for estate planning. You set aside a small amount of money on a periodic basis, in the form of a premium, and your heirs inherit a benefit in the event of your death.

If you die tragically young you win, so to speak — insofar as your policy pays out a far greater benefit than you've paid in premiums.

I'm not a terribly deep thinker on this topic.

To me, life insurance always seemed like a fairly straight forward bet: Taking out a policy is betting that you’re going to die — sooner rather than later — while the person writing the policy is betting you're going to live.

This is exactly as it should be. If you're an income earner with dependents, this is a bet worth making.

In the event that tragedy befalls you, your dependents are financially provided for; and, if you live to a ripe age—well, then you've done ok too.

There are of course lots of types of life insurance policies—as anyone who has spent ten minutes at a holiday party with an insurance salesman can tell you.

There's universal life, whole life, term life and probably lots of others that I've never heard of.

Some policies have longer durations than others; some policies pay out benefits in different ways; and others are so complicated, I suspect, that only actuaries fully understand them.

But the basic principle is the same: You're betting you'll die—while the house is betting you're going to stick around for a while.

Insurance companies, presumably, make their money in volume by pooling risk, and by charging a fair premium relative to the policy benefits.

Except when they don't.

In case you haven't heard: speculators will speculate on just about anything. And so it was perhaps inevitable that people would begin speculating on death. Lots of people, as it turns out.

So many, in fact, that a so-called secondary market formed in life insurance. And it is exactly what you would imagine it to be.

As the WSJ explains: "People sought to make fast cash by taking out multimillion-dollar policies on their own lives to sell to investors. Tens of billions of dollars worth of insurance changed hands. Under the deals, the investors pay the premiums until the insured person dies, at which point they collect the death benefit."

And, as you might further imagine, a market based on an idea this bad ultimately collapsed.

Once that happened, the Journal continues: "…[I]nsurers have portrayed themselves as the victims. They have filed hundreds of lawsuits over the past two years seeking to cancel policies they say weren't intended as estate-planning tools, as buyers purported, but were instead meant to enrich investors speculating on old people's lives. The industry also asked regulators to stop investors from wagering with their products."

And it doesn't end there.

Other lawsuits are now alleging that some insurers knew that the policies were intended for resale to speculators all along.

For example: "In the lawsuits, investment entities Olive Tree Holdings LLC and XLI Holdings LLC allege that [the insurer] Phoenix, around 2005, 'embarked on a concerted effort to regain momentum in its sale of life-insurance products.' The insurer targeted old people to buy high-face-value policies that the insurer 'knew were likely to be resold' to investors, in a 'scheme' aimed at generating large commissions and bonuses for its agents and managers, the suits contend."

Phoenix has denied the charge.

But even so: The allegation alone can make even the most revolting aspects of the subprime mess sound less icky.

Go home and hug someone you love—and try to forget you ever read about the secondary market for life insurance.

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