A story on ABC’s “World News” earlier this month focused on the life settlement industry and featured the story of Dr. Eddie Powell. After losing both his legs to a hospital infection, Powell joined the growing ranks of life insurance policyholders who are cashing in by selling their policies on the secondary “life settlement” industry. The 61-year-old, who needed money to continue his medical practice and help his three children through medical school, received a substantial payout on his policy. “For close to a million dollars of insurance, I got a hundred and some thousand dollars,” Powell said.
Coventry, which bought Powell’s policy, bundled it with others and sold it to banks or hedge funds. Because the investors will continue to pay the premiums, the sooner Powell dies, the better the return on their investment. The growing life settlement industry now welcomes the interest of Wall Street, which is getting in on the action.
“The ‘ick’ factor is there, and we’re certainly aware of it,” said Russell Dorsett, president of the Life Insurance Settlement Association. “The secondary market simply lets individuals bet on their own mortality. So, say that I am going to live longer than you think I am, I will take the money now rather than having to wait to die in order to get it. It’s no different than the life insurance business itself. Basically mortality, morbidity is a multitrillion dollar market.”
Critics of this burgeoning industry, however, claim that securitizing the life insurance industry creates the same scenario that led to the subprime mortgage boom and subsequent bust. That crisis began with banks loaning money to borrowers ill-equipped to repay them but really got going when Wall Street stepped in with collateralized debt obligations. These instruments allowed investors to bet that the risky loans would go bad. With trillions invested by Wall Street, banks’ incentive to issue risky loans increased. When the loans eventually went bad, investors got rich, while rest of the economy nearly collapsed.