Dying to Make Money – are you joking?
Thom Ruhe, Director of Entrepreneurship, The Kauffman Foundation
I spent part of my Labor Day Weekend getting current on my required reading. From the pile of magazines that invade my mailbox monthly to a week’s worth of various and sundry newspapers, which I still get in that good old-fashioned printed way (quaint I know), I sit down with a 20-ounce, home-brewed java and get to reading.
My ‘reward’ for knocking down the sizeable pile of print media is to get to the Sunday New York Times, which usually means that I am reading it by midweek. This weekend however was the exception as I actually earned my time with the Times, and got to it by late Sunday afternoon.
That enjoyment was however short-lived as one of the cover stories sent me immediately into a “you’ve got to be kidding” rant. Specifically, it was a story about yet another exotic investment scheme emerging on Wall Street. Like the catastrophic credit default swaps that helped create a global recession, this new scheme likewise creates no real product or value, enriches a few who package and rate this garbage, and will ultimately have unintended consequences that will have us all asking after the fact, "What were we thinking!?"
The scheme in question is packaging life insurance policies from holders that, in essence, short their own policy by taking a significantly reduced distribution prior to their impending demise. The investors then hold those policies until the inevitable passing of the insured and then collect the face value of the policy – usually as much as 60% greater than what the insured received. This is to say nothing of the insured’s estate which may likely get stuck with unpaid medical bills, taxes, and burial expenses.
The way it was originally intended by the insurance industry, it was a benefit for those who get the terrible news of a terminal condition. The Living Benefit as it is referred to, was intended to provide an option for comfort or directed allocation while the insured is still alive. Of course the insurance companies are acting in their own self interest in offering this product (rider) as they too discount what would have been a larger death benefit.
With this aggregation and productizing of such “investments” however, we will slither to new depths as we seek returns by way of people dying – in large numbers.
One of the crazy debunked distractions of the healthcare debate has been the existence (not) of so-called death panels. If this investment vehicle goes mainstream, we may yet see the formation of death panels. And the irony of it will be that they will actually have an incentive to lobby against healthcare reform or the offering of any life extending treatments as they only cash out when someone dies. This is sick and twisted … even by Wall Street standards.
What do you think? Let us know below.
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