In case you didn't know, we are in a recession. Of course, whether we are at the beginning, middle or end depends on where you get your news, your political bent, and how well your investments have weathered the storm. One thing is certain though - desperate times call for desperate measures, and this can lead to unusual albeit creative ideas...enter securitization of life settlements.
A life settlement is a fairly simple concept. You own an insurance policy and, prior to your death, you sell the policy to someone else typically for a lump sum of cash. If you're the seller, you get money you might otherwise need. If you're the buyer, you're essentially gambling the person whose policy you purchased will die within a certain period of time before you have to start making premium payments on the policy that could exceed the amount you paid. Bet right, and you will receive the proceeds from the insurance policy for a fraction of the amount you paid on the investments. Bet wrong and you could be stuck paying premiums on the policy for years. Morbid, you say? Maybe, but putting ethical, philosophical and religious beliefs aside, is there really anything wrong with it?
In the simple one on one transaction where an individual or company purchases a life insurance policy from an owner and pays the insured a lump sum cash payment there probably really isn't any harm, provided the transaction complies with state and federal laws, and the parties understand the risks associated with the transaction, which often leaves the insured unable to procure additional life insurance. Indeed, if you're the insured, you better have your estate planning already in place, because it is unlikely you will ever be able to get any subsequent life insurance.
But what about secondary market implications? Suppose for instance, the individual or company who purchased the policy wants to turn around and sell it on the open market with a group of other policies, bundled together and securitized as an investment. If this is starting to sound to you like the securitization of mortgages that led to the financial collapse of numerous banks and businesses around the country over the past few years, you're not alone; SEC Chairman Mary Schapiro may be thinking the same thing, which is why she has implemented a task force to review the efficacy of securitizing life settlements. For all practical purposes, the same problems that caused securitized mortgage bundles to fail may be lurking here. Over or underrating the riskiness of these investments would have disastrous consequences. At the very least, we should have a uniform system in place to help purchasers and sellers evaluate the risk of their investments and high level transparency in the marketplace.
The SEC appears to be off to a good start in analyzing this relatively new type of investment. Anyone care to bet whether life settlement securitization will face an early demise?
