NCPA - National Center for Policy Analysis

LIFE INSURERS FACE THE FUTURE, GRUDGINGLY

August 9, 2006

"Viaticals," or "life settlements," are geared toward buying high-value life insurance policies from older folks who might have had a health reverse but still have several years of life expectancy remaining.  Consequently, it establishes the principle that a life insurance policy is the property of the insuree, and he or she can sell it to somebody else, says columnist Holman W. Jenkins, Jr.

Consider:

  • German investors were particularly keen to enter the market thanks to favorable tax laws; at last count, more than 20 German funds have been set up to invest in the death benefits of Americans.
  • Warren Buffett's Berkshire Hathaway and insurance giant AIG also dabbled in the business.
  • With more than $9 trillion of life insurance in force, Sanford C. Bernstein & Co. estimated last year that the market for "used" policies already topped $13 billion and it could hit $160 billion by 2030, depending on whether Congress kills the estate tax (the motive for many purchases of high-dollar life insurance) and other boomer financial considerations.

All along the insurance industry has been disgruntled about this new marketplace.  One good reason was a suspicion that a few people buying insurance were hiding illness to get coverage, then flipping the policy to an investor for a sizeable payment.  Fraud aside, though, the industry also worried about its "lapse" assumptions, says Jenkins.

Insurers may wish the problem would go away, but it won't, leaving them only the choice to tighten up their underwriting.  But they can at least applaud themselves for casting enough doubt on the life settlements industry that, so far, their existing book of business has not gone belly-up.  Insurers may soon begin to notice a happier ending, in which the existence of a secondary market actually makes life insurance a more attractive product, says Jenkins.

Source: Holman W. Jenkins, Jr., "Life Insurers Face the Future, Grudgingly," Wall Street Journal, August 9, 2006.

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