John D. Copeland
Wall Street bears much of the blame for the nation's ongoing recession.
Seeking greater profits, Wall Street banks and investment companies offered a variety of creative and risky investments, such as subprime mortgage securities, collateralized debts and credit-default swaps.
Regardless of the dramatic failures of those investments, Wall Street continues to create risky investment products. The latest fad exciting Wall Street is securitized life settlements.
Life settlements
In a life settlement, a life insurance policy owner sells a policy on his life to a life settlement company, or other investor, for 20 percent to 40 percent of the amount owed at the insured's death.
For example, an investor might pay an insured $200,000 for a $1 million life insurance policy. The investor now owns the policy and also becomes the policy's beneficiary. While the insured lives, the investor pays the policy's premiums. When the insured dies, the investor gets $1 million from the insurance company.
Good reasons exist sometimes for an insured selling a policy. Possibly, an insured's estate plans change and the policy is no longer needed. Perhaps the policy's premiums become too high and the insured doesn't want to let the policy lapse.
Most policy owners, however, sell their policies because they are desperate. Medical bills, business closures or job loses may necessitate an insured selling a policy for immediate cash.
Life settlements are not new. According to the Life Insurance Settlement Association, life settlement companies purchased $1 billion in insurance policies during the past 10 years. The company profits when the insured dies. The earlier the insured dies, the greater the profits. A company profits even more when the insured dies in an accident and the companies collect under the policies' double indemnity clauses.
A new twist, though, is Wall Street's desire to securitize life settlements. Investors and traders profit from fees for bundling life settlements, and then from selling, reselling and trading the bundles like securities. It is the same discredited model Wall Street used to profit from subprime mortgages.
Dangers of securitized life settlements
Bundled securities may contain some unenforceable life insurance policies.
Some states require an insured to own an insurance policy for up to five years before it can be sold legally. A securitized life settlement containing illegally sold policies is worthless.
The risk exists of predatory brokers and unscrupulous life settlement companies pressuring the ill and elderly to sell their policies at less than market value. For example, Coventry, one of the largest life settlement companies, was under a three-year investigation by the New York Attorney General's Office for suspected bid-rigging with its rivals to keep offers low for life settlements. According to Life Settlement Reports, Coventry settled with the state of New York on Oct. 1 for $12 million.
Lawsuits against investors in securitized life settlements are possible. Life insurance policy sellers victimized by fraud or other unscrupulous means could challenge the validity of securitized life settlements containing their policies.
But so far, the life settlement market remains largely unregulated, as does the securitization of life settlements.
Morality issue
Wall Street's excitement over profits from securitized life settlements ignores the morality issue. The holder of a securitized life settlement bets on the early deaths of those insured in the investor's bundle, because the sooner the insured dies the greater the investor's profits. The investor bets against medical advances that prolong the lives of the ill and elderly, because such advances jeopardize the investor's profits.
There is something repugnant about such an investment. To borrow a line from "Executive Suite," an excellent 1954 movie on the struggle for corporate power and profits: "Some ways to make money just don't seem right."[[In-content Ad]]
John D. Copeland, J.D., LL.M., Ed.D., is an executive in residence at The Soderquist Center for Leadership and Ethics and a retired professor of business at John Brown University in Arkansas. He's also a Kallman executive fellow at the Center for Business Ethics at Bentley College in Waltham, Mass. He can be reached at jdcethics@gmail.com.
