The next financial instrument to screw things up for regular people is...

Jonny_B

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Oct 14, 2004
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Life Settlement!

Life Settlement is an agreement you make with a company to sell your life insurance policy to them for a lump sum. You can decide this is necessary for a couple reason.

1) You can no longer make payments on the policy, and if you don't sell it will have to cancel it

2) You need money and have no other way to raise it.

What you do is sell your life insurance policy. The buyer will continue to make the premium payments on the policy, and will collect on it when you die. (Pretty sure their model doesn't include any mortality rate less than 100% over the long term)

Why is this bad for regular people?

Life insurance policies are priced by actuaries. Actuaries (statisticians/economists/financial analysts rolled into one) work out how much to charge for a life insurance policy based on a number of factors including age, race, sex, location, habits (smoking etc.), preexisting conditions (sicker people pay more) etc. They collect mortality data from all available sources and using it determine how cheaply they can price your policy (to make it competitive in the life insurance market) and still make decent money.

Another thing that they consider is how likely someone is to pay premiums for a period of time and then cancel the policy before they die.

Now that there is a Life Settlement industry, the acturial model will have to change to reflect fewer policies being cancelled before being collected on. This will result in higher insurance rates for all.

Ta-Da!
 
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That's why it took them a while to come up with the "Life Settlement" name. There are plenty of firms that won't participate in the industry simply because of the nature of it being a bet on people dieing sooner rather than later.
 
You could also compare it to the Credit Default Swap industry. Where a CDS is insurance against the failure of a bond you don't own, a Life Settlement is insurance against the death of a person who's death would otherwise not affect you.

The only difference thus far is that you still can't take out a policy against someone you're not tied to, you can only buy the policy they took out. Life insurers know that it's preposterous to allow someone to take out a policy against a stranger. It's too bad the people selling Credit Default Swaps didn't feel the same way.
 
They really factor in cancellation rate? I can't see that having much effect...
cancellation rate would have a very large effect. that means years of premium payments and little to no payout. even if there is a cancellation payout, it's significantly less than was paid into the program.
 
cancellation rate would have a very large effect. that means years of premium payments and little to no payout. even if there is a cancellation payout, it's significantly less than was paid into the program.

I would really think that would be offset by the people who pay for a year and die or something. No?
 
I would really think that would be offset by the people who pay for a year and die or something. No?
whether it's an even trade or not, i don't know. but it's taken into account and when the cancellations decrease or stop then premiums have to go up to help balance the people who pay for a year then die.