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Wall Street Greed Life Insurance Settlement Bonds

Updated on September 11, 2014
bgamall profile image

Gary understands that times are tough, and seeks to make people aware of financial pitfalls. Loans must be undertaken carefully if at all.

Life Settlements and Wall Street

Life settlements are a way to sell a whole life insurance policy to a third party, in return for cash that is in excess of cash value that you would ordinarily receive from the insurance company if you cashed out. When you die, having sold to a life settlement company, the third party investor with the life settlement company cashes in. Wall Street, who bundled mortgages to create the disaster of the financial meltdown, now wants to bundle these life settlements, and sell the bonds to investors.

While, on the surface this looks like a legitimate endeavor for investment banks on Wall Street to securitize, the problem is that there already is a need on the part of life settlement companies to gain access to a person's medical records, to inquire about the health of the person who sold his life insurance to the life settlement company. That would be an infringement to privacy. It is likely that the investors will have access to that health information as well as the life settlement companies.

More importantly, this will likely raise premiums. As more people take advantage of life settlements and do not let their policies that they don't need lapse, there will be more payouts required by the insurance companies. They will have to pay out and the result will be that they will have to charge more.

Update: Wall Street Life Settlements Are Back!

While Goldman Sachs has pulled out of the Life Settlement business, a company called Life Partners Holdings out of Texas is quietly buying up life insurance policies, and slicing them up into bonds just like bad mortgage loans were packaged up and sold to investors. As it turns out, many of the people the company is betting on to die within a certain amount of time are living twice or three times as long as the company has indicated. One investor was annoyed, and you wonder if she was annoyed at the person for not dying in a timely manner or if she is annoyed at the Life Partners organization.

Regardless, this is really a disgusting business when you think about it. Legal to be sure, but it is very disgusting, betting on when a person dies. Too bad the insurance companies would not just pay a reasonable cash settlement if a person has paid on his policy for a lifetime.

Update: Life Settlements on Hold by Goldman Sachs.

Goldman saw less interest in their mortality index and life settlements market so they exited the market, for now. While the CDO bonds for life settlements are on hold, Goldman owns two firms that purchase the settlements on a stand alone basis. So in the future this bond business may be unfortunately revisited.

Link: A Renewal of Life Settlements on Greedy Wall Street

The Home of Wall Street Greed

The Concept of Insurable Interest

Perhaps the greatest theoretical danger to life settlements is the concept of insurable interest. The concept basically is the understanding that if a third party stands to collect they have a motive to murder the insured! The securitization of these products may diminish this danger, however if a bunch of folks lived longer than the investors would be told is likely to happen, the fees paid by these investors could be much more than originally bargained for. This morbid Wall Street game would be to wage war on the insurance companies, and premiums would no doubt escalate.

The risk to investors in having to pay the recurring fees on the policies in addition to the initial settlements to the insured makes this game a very big gamble. While an individual investor may be able to monitor his risk, it is unlikely that those buying securitized bonds would be able to adequately monitor their risks.

Without the ability to monitor risk, would there be shoddy underwriting of policies? Could there be some gaming of the system, causing the entire market for these investments to dry up as mortgage backed securities and CDO's have dried up? No one knows.

Explanation of Life Settlements

What is the Greatest Scam Possible with Life Settlements?

I suppose that, while not likely, it is possible for insurance companies to collude with the investment banks. In return for kickbacks, and the ability to raise insurance rates across the board, insurance companies could write policies to folks who are in ill health. They could have doctors lie about medical conditions. This would allow the Life Settlements scam to manifest to great financial benefit to the investment banks. It could give insurance companies the ability to radically raise insurance rates and make more money for themselves. Again, I don't know if this could be hidden from regulators, but liar loans were hidden. People could state whatever income they chose to get a toxic loan. So it seems logical that the same game could be played with insurance, to the detriment of all but the investment banks and insurance companies.

The issue I have is not with the concept of a life settlement. Private companies buy those in an effort to make money but also it provides a service to some with financial issues and chronic disease. The issue I have is with the securitization of viatical settlements. The securitization can raise insurance rates as I just explained, and it can cause a morbid betting among investors in what amounts to a feeding frenzy. And yet, many times the investors are left holding the bag as the insured ends up outliving the profits on the policies. The company setting up the securitization has the upper hand and stands to profit the most. As in the housing bubble, this profiteering should be illegal. I would like to see life settlements continue, but the securitization of these viatical settlements banned permanently.

The Greatest Danger for Investors

The greatest danger for investors in this high stakes game is to overpay for the settlements. If each settlement is valued based upon the health of the insured, with the settlements for the ones in poorest health being the most valuable, investors could be both deceived and or lied to as to the value of the settlements.

Certainly it would not be above Wall Street to lie to investors as they did with mortgaged backed securities. Heck, they may even be able to coax the ratings agencies like Moodys and Standard and Poors and Fitch to highly rate these settlements, giving investors a false sense of assurance as to the cost versus the rewards of the bonds. I am not saying that the ratings agencies will go along. We will have to see. Meanwhile, investors beware, as the casino called Wall Street is open for business and is exploring every potentially shady deal it can make a big return on.

Could We See Collateralized Death Obligation Swaps?

Securitization of life settlements into Collateralized Death Obligations would be morbid enough. But what if bankers wanted to make fees off the swaps? Swaps are a bet on which way a bond will go, whether it will default or not. Since it is unlikely that these bonds would default, the bet could be on how soon the fellow will die. I realize that is an unlikely scenario, but I put little trust in Wall Street. Truth is, you can bet on just about anything with a swap!

Thanks Phil Gramm for giving us legalized gambling with swaps, that now may be used to bet on the timeliness of death! What a great American and Texan you are!


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    • bgamall profile imageAUTHOR

      Gary Anderson 

      8 years ago from Las Vegas, Nevada

      Thanks for stopping by. I think this is a big problem for America, not just these bonds, but all bonds based upon rampant speculation.

    • AllSuretyBonds profile image


      8 years ago

      Great article. Very informative information. The greed of Wall Street will never stop and its just another way for them to make some money off of us.

    • bgamall profile imageAUTHOR

      Gary Anderson 

      10 years ago from Las Vegas, Nevada

      They will not stop at anything because they think they have absolute power. It just looks that way.

    • Petra Vlah profile image

      Petra Vlah 

      10 years ago from Los Angeles

      The greed of Wall Street and the corruption of the entire financial system is outrageous. Those guys will stop at nothings

    • bgamall profile imageAUTHOR

      Gary Anderson 

      10 years ago from Las Vegas, Nevada

      It is the corruption of America for sure, Dolores.

    • Dolores Monet profile image

      Dolores Monet 

      10 years ago from East Coast, United States

      The whole concept is weird but just another odd investment scam for the big boys to make money off regular folks. I have a hard time understanding a lot of this Wall Street investment crap, trading on death, trading on artificially valued commodities, the nonsense with the bundled makes me dizzy.

    • bgamall profile imageAUTHOR

      Gary Anderson 

      10 years ago from Las Vegas, Nevada

      Nice link but don't know if congress has the balls to fix anything having to do with Wall Street's domain. :)

    • Tom Whitworth profile image

      Tom Whitworth 

      10 years ago from Moundsville, WV

      Latest from Pittsburgh Post Gazette.

    • Sandyspider profile image

      Sandy Mertens 

      10 years ago from Wisconsin, USA

      I can't agree more!

    • bgamall profile imageAUTHOR

      Gary Anderson 

      10 years ago from Las Vegas, Nevada

      HXPROF, I have added a section about scamming and how insurance companies could collude with investment banks to get larger fees for insurance. I don't know if they would have the balls to do this, but it happened with mortgages, so why couldn't it theoretically happen again?

    • bgamall profile imageAUTHOR

      Gary Anderson 

      10 years ago from Las Vegas, Nevada

      Certainly life insurance companies could lose their tax exempt status if Congress gets fed up by this benefit going to investment banks instead of to heirs. I don't know if insurance companies themselves can stop this sort of thing by contract. I would think that it would make the policies worth less.

    • profile image


      10 years ago from Clearwater, Florida

      Bgmaill, can't life insurance companies prevent this practice by contract with the insured? In other words, prevent the insured from selling the policy when they sign up for it?

    • bgamall profile imageAUTHOR

      Gary Anderson 

      10 years ago from Las Vegas, Nevada

      Yes Tom, can you imagine someone betting on the life settlement contract? One guy bets that the person will die before such and such a time and the counterparty bets that he will live longer. I see this swap game being applied to this securitization and probably that is the main reason they want to do it. I could see banks making a fortune on swap players betting on how long someone will live. That is beyond repugnant. Something has got to stop these investment banks from pursuing their perverse activities.

    • Tom Whitworth profile image

      Tom Whitworth 

      10 years ago from Moundsville, WV


      The first time I ever heard of cash settlements was back in the early 1990's. The cash settlements were being paid primarily to patients who had AIDS and their insurance limits had run out. These patients were being paid about $.10 on the $1.00 for the face value of their life policy.

      I remember there was quite an outrage over the practice at that time, but I do not remember any resulting legislation. There may have been some, but I can't remember it.

      I read yesterday about the new financial instrument you speak about. My initial response was one of repugnance. I have been thinking about this product and I can't find any justification for it's existance.

      I would like to see banks invest in traditional lending. I would like to see Wall Street firms invest in the equity markets. I would like to see the commodities markets trade in commodities.

      There has to be some sane limits as to what is considered an investment.

      I guess Government health care could make life settlement swaps a sure bet.


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