Life Settlement Bubble?

Life settlements got interesting coverage in the two recent articles from well known media sources. The first was a NY Times article about life settlement securitization, entitled "Wall Street Pursues Profit in Bundles of Life Insurance". The second was in the Business Insider in an article entitled "10 Economic Bubbles in the Making".

The first article did a brief overview of the life settlement industry. It then discussed, the push by some life settlement investors to bundle life insurance policies and sell them off as bonds. While securitization isn't new to the life settlement industry, having the securitized policies rated and the resources currently being lined up for securitization certainly is. One troubling aspect of the article, was the parallel the author drew to the mortgage meltdown. It suggested, since mortgages are out of favor on Wall Street, life settlements could be come the new securitization darling in housing's place.

The Business Insider's article was an illogical extension of the securitization article in the New York Times. Of course, the article went onto discuss potential sub prime life settlements. Then it talked about too much money flowing into life settlements and surmized something bad will have to happen, just as it did with mortgages. These are very large and very dangerous leaps of reasoning and lack of understanding. Judging by the several hundred comments posted in response to the online article, it was obvious the parallel drawn by the author had more than a few scared. Let's separate fact from fiction.

First, increased securitization will obviously fuel demand for policies. However, there are a finite amount of viable policies in the marketplace. Buyers can only buy policies from insureds with a certain life expectancy. If policies are bought from individuals that are too healthy relative to the premium amounts, the investment becomes a money loser very quickly. It is hard to imagine anybody doing that because the math is too obvious. There are only so many people that are of the right age, with the right policy size. We are no where near market saturation, but at full saturation that number is very small relative to the mortgage industry and could not cause a catastrophic economic meltdown as it did with housing.

Secondly, the trend we've been noticing is more conservative buying rather than more aggressive buying. Life settlement providers are being much more selective about the policies they are bidding on than say a little over a year ago. In part because life expectancies have been adjusted upwards and investors are trying to ensure their investments are going to return a profit. So for the moment, it really doesn't seem like rampant speculation and free flowing money are driving the life settlement industry. Conservative, methodical buying is.

The life settlement industry always has and always will (for the foreseeable future) be the subject of much discussion from people who don't fully understand the longevity and life insurance settlement marketplace. However, as long as the ability to buy and sell one's own assets are protected as a consumer's right, hopefully the increased exposure to the life settlement settlement industry will encourage healthy debate and encourage more seniors to become educated on the benefits of life settlements before making financial decisions.

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