Life insurance is a complicated issue in the United States.
Consumers are constantly bombarded by commercials reminding them their odds of living are not the best, scaring them into paying large amounts of money for a plan that many allow to lapse before they die. Life insurance is a great idea for many and has kept many families afloat after devastating losses, but the next loss might be that of the insurance companies.
As a result of the recent economic downturn and the failure of the stimulus package, Wall Street has turned to a new risk: buying life insurance policies. Insured people are paid a fraction of their policy, with the size depending on life expectancy and health.
The more likely they are to die, the more they are paid. Then the bankers plan to “securitize” these policies by packaging large groups together into bonds. The bonds are then resold to investors, like big pension funds, who will receive the payouts when the person with the insurance passes away.
Wall Street is concocting a plan that will not only destroy the life insurance market, but will destroy the security of families across the country — you all remember the turmoil that ensued after Wall Street did the same with mortgages.
The idea is still in the planning stages. Already, it doesn’t bode well for families in the U.S. As it looks, life insurance premiums will go through the roof.
Many times, those who have life insurance policies let them lapse after necessity is gone, such as after children grow up or once they become more financially secure. When this happens, the insurance companies never have to pay out on the policy, but if they are purchased by Wall Street, they will not be allowed to lapse and life insurance companies will lose their main form of profit.
Critics bring up the moral side of this issue as well. Life insurance is supposed to provide a sense of security for families; it is not supposed to be a bargaining chip for brokers. But the morals are not the only problem.
After AIDS treatments were developed in the mid-1980s, investors who bought policies from infected patients plummeted into debt. With all of the breaking medical research and discoveries, there is no doubt that within a few years these investments will be more trouble than they are worth.
Continuing to pay for premiums on people who are living far longer than expected will obviously lead to another economic downturn, to say the least.
The challenge for Wall Street is to make the business of securitizing life insurance policies predictable. The unfortunate truth, though, is that life and medicine are far from predictable. The same was true for those who financed subprime mortgages. No one could predict how the new homeowners could afford to make their payments, but the banks believed that there was no way that many people could default at the same time. They didn’t realize that their logic was badly flawed until it was far too late.
The life insurance gamble carries nearly the same level of uncertainty. On top of medical uncertainty and the potential for increased life expectancies, is the issue of regulation.
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When trading these bonds, it is nearly impossible to regulate all the paperwork on all the loans. Just like with mortgages, the owner will be disputed. When a person dies, who guarantees that the right person is getting the payout? Without impeccable regulation, the system will flop instantly, and the economy will get even worse.
So how is life insurance securitization really going to work out? Wall Street thinks it is a great way to bounce back, but when you look at the real risks, all Wall Street is doing is going back to its old ways of gambling.
Unfortunately, not even Wall Street has enough luck to make this risky plan a worthwhile investment.
Eloise Rodgers is a columnist at the Campus Times, serving the University of Rochester in New York.
