AIG sinks to a new low by securitizing the practice of betting on the early deaths of elderly people. by Bill Gee
(centrist)
Tuesday, April 26, 2011
Since 2001, American International Group (AIG) through its Chartis property-casualty division, has been engaged in a line of business that is almost too gruesome to be true. AIG calls the business line "life-settlement", but critics of the practice has called it "death bonds", "blood pools" and "collateralized death obligations".
This is the way it works. Let’s say that you and your spouse are getting up in years, but you are afraid that you did not adequately save up for retirement. In fact, as you reach your mid-seventies, you find that you still have a substantial mortgage on your home, credit card bills, and other household debt that will make it difficult, if not impossible, to retire. The one asset you do have is a nice whole-life insurance policy that you pay a monthly premium to maintain. For the sake of argument, let’s say your total death benefit is $200,000, which you pay a monthly premium of $200 to maintain.
Your friendly insurance agent says to you, “Hey, why don’t you cash out your life insurance policy now, that way you can pay off your debts and retire with some relative comfort?” The insurance will pay out 75% your life insurance benefit now, take over your monthly premium payments and then receive the full benefit for themselves when you die. So you get a check for $150,000, and you have one less bill to pay. The insurance company realizes a reduced claims loss by paying you less than if you died today, and the additional premium cost can be applied to “loss control” expenses. It’s a win-win, right?
The obvious risk to this program is this: What if you don’t die? Yes, everyone dies, but with life spans constantly expanding, a person in their mid-seventies may not find themselves in the Hereafter for another twenty or thirty years. At the most, $150,000 (taxed as regular income if you take it in a lump-sum) will last you three to five years, at which time you will find yourself looking for other ways to generate the cash you need to survive. By the time you actually do die, your family may discover that they owe tens of thousands of dollars in new debts and no life insurance check to pay for them.
Meanwhile, the insurance company’s risk is not so dramatic. By paying out the early death benefit, they saved their company $50,000 in “recovered losses”. Remember that they will assume the monthly premium of $200 a month for the policy. In that scenario, it would take nearly 21 years for the insurance company to “lose” on their bet. However, if the insured dies within ten years, the company will have saved themselves $25,000 in “recovered losses”, while the family of the insured will be likely on the hook for over $100,000 in new debt.
But wait, there’s more!
AIG estimates that the accumulated death benefits that they’ve written since 2001 is worth at least $18 billion, and they now want to sell that benefit as a security to investors. (That's about $4.5 billion in life insurance benefits that was supposed to go to our grandparents and their heirs, but is now contributing to the profits of the insurance industry!)
This is the way it would work. Let’s say AIG takes a “pool” of these “life settlement” policies that are worth $500 million once all the participants in the pool have died and it sells it to an investor as an investment vehicle. As each person in the pool dies, the investor will receive a payment, and each month, the investor will either pay the premiums on the policy, or net the received death benefits against the remaining premiums that are due. The market value of the security will be determined by the number of policy holders in the pool. It is unclear as to whether the ages of the particpants will be included in the prospectus of the security but if it is, it will likely be hidden behind technical language much the same way that Subprime Mortgage-Backed securities are hidden. That is why critics have called this security a “death bond”. The more people that die, the larger the payout for the investor!
Thankfully, Standard and Poors (S&P) has refused to grant this type of security a rating, so at the moment they cannot be sold to investors. However, if Finch or Moody’s decides to give this type of security a rating, the implications for senior citizens would be dire.
1) Investors are constantly looking for new investment vehicles that can provide a positive cash flow with limited risk. The “Death Bond” would allow investors to realize investment gains that will not be tied to the overall economy. In fact, if the economy gets worse, it is more likely that the health of seniors on a fixed income will suffer. Therefore, this investment could be considered an excellent “hedge” against a poor economy. If Medicare changes to a voucher system where seniors will be at the mercy of Health & Life Insurance companies, these securities will be HOT!
2) In order to feed the sudden demand for these types of securities, life insurance companies will actively seek out elderly seniors to add to their pool. This is one case where having a poor health history would make you attractive to the insurance companies! This is what happened with the Subprime housing market. The need to feed the demand for Subprime Mortgage Security market encouraged lenders to grant mortgages to anyone with a pulse (sometimes a name was enough).
3) As seniors with poor health histories are eaten up by these “pools”, they’ll start going after people who are in relatively good health, but are suffering from financial difficulties. These are the people that will find themselves making a choice between suicide and burdening their families with massive debts after their money runs out. The insurance company nor the investor won’t care because the benefit pays out whether the insured dies from suicide, homicide or natural causes! In other words, the insurance industry and their investors would have an incentive to ENCOURAGE your death, whether you are in bad health or not!
4) Seniors that stubbornly hold on to life years after the policy has run out may find their medical insurance claims mysteriously held up or denied. Families may find themselves in time-consuming appeals with health insurers as grandma slowly fades away. Doctors may find themselves under increased pressure from their insurance carriers to refrain from life-saving treatments or to pressure families to include DNR (Do Not Resuscitate) orders with every patient over 75 years-old who enters the hospital.
Besides the obvious “ick” factor when it comes to this practice, it is yet another example of how the extremely wealthy will take your very last dollar in order to protect their wealth from a financial system that is designed to push all wealth from the very poor to the very rich.
This has to stop!
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The views expressed
in this article are those of Bill Gee only and
do not represent the views of Nolan Chart, LLC or its affiliates.
Bill Gee is solely responsible for the contents
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