Life Insurance Companies Don’t Like to Pay Either

The Wall Street Journal has a piece titled “Insurers Sued Over Death Bets: Scrutiny on Secondary-market Policies That Paid Investors When Others Died” by Leslie Scism

The story runs something like this.  Old people take out insurance on themselves.  Then they sell it to investors, who collect on the insurance if the old person dies.  It is very similar to the same racket that various companies, such as Wal-mart, are involved in with taking policies out against their employees.

The insurance companies were taking their fees, and occasionally one of the old people would die, but of course the actuary tables should be able to take that into account: right?

Apparently not.  Because the insurance companies have been denying benefits, and preemptively canceling policies.  Why?

Well buried in the seventh paragraph we find out:

The life-policy secondary market was one of many sent reeling by the global financial crisis of 2008-09, but it also has been hurt by revised actuarial tables, which show older people living longer

What, say it is not so!  The insurance companies denying benefits because they found an error in their tables!  It is not possible.

The insurers contend they are acting in the name of good public policy: State insurable-interest laws require an insurance buyer to have a bigger stake in the insured person’s continued well-being than in his death.

Mind you these are the people that have begun data-mining social networking sites to help to obtain additional information on prospective client that would likely not pass muster with the FTC if asked on an insurance application link.  But that is different:  they aren’t losing any money doing that!

6 thoughts on “Life Insurance Companies Don’t Like to Pay Either”

  1. Insurable interest is a cornerstone of all insurance polices. If the named insured sells their interest in their policy they no longer have an insurable interest. It is up to the buyer to read the policy as the original insured has now been compensated for their interest. The contract is no longer valid as one of the original parties has voluntarily given up their interest.

  2. “Insurable interest is a cornerstone of all insurance polices”.

    No it is not. If it were, you would not have things like credit default swaps, and naked puts. The practice of Wal-mart on taking out life insurance policies for their cashiers is pretty much in the same category. It came about because people thought it was ghoulish to be taking out life insurance policies on people you did not even know. That does not mean that it is a necessary function.

    If you look at the article, you will note that the industry did not stop cancelling the policies until they started losing money on them. Writing language into a policy contract that goes against the expressed purpose of the known reason why people are buying the policy is not exactly new for the insurance industry and an interesting way of defending the industry. Further, if the policies were void at inception, than the insurers should return the premiums as there never was a contract. But of course they don

  3. It will all be decided in court. It is clear people who buy the policies with this in mind are trying to “beat the system”. I would suspect the entities who are buying these policies will not be around long.

  4. Your post makes no sense. If people are living longer, then life insurance companies are making more money (premium) by continuing policies in force, not by cancelling them. As your quoted material says, the “secondary market” is losing money, because it has to pay additional premiums, and has to wait longer to recover the policy benefits. This secondary market is made up of the people who buy the policies from the insureds. The secondary market is not the insurance companies. You’ve completely confused the two.

  5. Not paying, and dragging things out in court is a pretty well known industry tactic. As a long term tactic it is likely to be a disaster: at least while our country still holds elections.

    You are ignoring the fact that they were “beating the system” with the systems complicity.

    One is curious if the original idea was a win-win situation between the investors and the insurers. Both made their money on their investments and then used the investor used the tax status of life insurance policies to avoid taxes. That would have been the (semi-)intelligent way to plan it. I don’t know enough about the tax laws to know if that would work.

    More likely it was just another example of front end looting. The insurers made their money up front and booked it in net present value terms: instant quarterly boost for stock option incentivised management, with the money in pocket before the downside hit. Of course a suspicious person would argue that at least some of these deals were made with an understanding that there was no intention of paying out.

  6. Billdees,

    Sorry I did not see that your comment was hung up: not sure why it was.

    I think you are mis-reading the quote: but it is easy to do because it could be read either way. I think what the quote is trying to say is that the tables show people are dying faster than the tables indicate. That is the literal reading in any case.

    The article is pretty clear that the battle is between the insurance companies and the investors, and that it is the insurance companies that had started to lose money on the deals.

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