FacebookTwitterGoogle+RedditEmail

Death Pays

The fun has not gone out of banking after all. Following the disastrous fall of 2008, conventional wisdom had it that many of the things that made banking fun, like amazing bonuses and fascinating (if not understood) financial instruments were going to follow the dinosaur into extinction. That, of course, did not happen. Bonuses are as big as ever and a recent announcement discloses that a new financial instrument that is far more interesting than a bundle of mortgages is about to hit the market. It involves life insurance.

For years life insurance was thought of as something to provide cash following its owner’s death to be used for a variety of purposes ranging from the payment of taxes to providing funds for young families to replace the lost earnings of the parent who died. As families grew older, in many cases the need for life insurance diminished. Owners of those policies took advantage of the cash value in the policy and accepted that amount from the company in lieu of keeping the policy in force. Since the cash value the policy holder received was much less than what the company would have to pay were the policy in force at the policy holder’s death, the insurance company was delighted to redeem the policy for its cash value instead of its face value.

Unfortunately for the insurance companies, a greedy group of people sprang up who said to policy holders that getting cash value from the life insurance policy was a rip-off. They offered to buy the policies for more than their cash value. The purchasers figured out how long the insured was likely to live and, adding in the policy proceeds payable at death, came up with a price they were willing to pay the insured. The insured, who no longer wanted the insurance, was delighted to have more than the cash value of the policy to spend before death. Sensing a good thing, Wall Street has figured out how to turn this practice into something that is even better than the collateralized debt obligations based on mortgages. (Those would have been a win-win situation for everyone if the unimaginable and unimagined had not occurred.) This latest financial instrument is a guaranteed win-win almost for sure. Here is how it works.

Assume that one thousand very old people all have $1 million life insurance polices with low cash values. Those people would not be tempted to cash in their policies for the cash value. Along comes a bank and agrees to pay each of them $700,000 for the policy. It names itself the beneficiary, begins paying the premiums and bundles the 1000 policies into a $700 million bond called “Death Pays” and sells interests in the bond to investors. If all the insureds die within 30 days, the investors will be thrilled because Death Pays will now be worth $1 billion, an increase in value for the investors of $300 million in 30 days. If, however, all the insureds take the money they got from selling their policies and go on a tour sponsored by AARP to a spa that has a treatment that gives them an additional 30 years of life, the holders of “Death Pays” will be less than thrilled. (Were that to happen the issuer of “Death Pays” bonds might hire hit men to accelerate events that would cause the policies to mature but that brings with it a completely different set of problems that are beyond the scope of this column to examine.)

Life insurance companies are not terribly happy with the idea that their policies will remain in force instead of being sold for cash value. If this new idea catches on, more and more of their policies will be bought and kept in force until the happy day the insured dies. Indeed, Kathleen Tillwitz, a senior vice-president at a firm that is rating 9 proposals for life-insurance securitizations from private investors told the New York Times that “our phones have been ringing off the hook with inquiries.” An investment banker not authorized to speak to the NYT (or other media) who spoke to the NYT said: “We’re hoping to get a herd stampeding after the first offering.”

Some analysts say that this is a wonderful new product since death is not related to the rise and fall of stocks. They are right, unless a dramatic fall in the stock market is accompanied by falls from window ledges as happened during the great depression. If that were to happen the amounts owed by the companies on the life insurance policies could exceed the insurance companies’ ability to pay, thus causing their insolvency and the need for a government bailout. Thanks to the sophistication of those constructing these new investments, that almost certainly will never happen.

CHRISTOPHER BRAUCHLI is a lawyer in Boulder, Colorado. He can be e-mailed at brauchli.56@post.harvard.edu.

 

More articles by:
Weekend Edition
August 17, 2018
Friday - Sunday
Nick Pemberton
Donald Trump and the Rise of Patriotism 
CJ Hopkins
Where Have All the Nazis Gone?
Jeffrey St. Clair
Roaming Charges: Running Out of Fools
Joseph Natoli
First Amendment Rights and the Court of Popular Opinion
Andrew Levine
Midterms 2018: What’s There to Hope For?
Ajamu Baraka
Opposing Bipartisan Warmongering is Defending Human Rights of the Poor and Working Class
Paul Street
Corporate Media: the Enemy of the People
David Macaray
Trump and the Sex Tape
Daniel Falcone
The Future of NATO: an Interview With Richard Falk
Robert Hunziker
Hothouse Earth
Cesar Chelala
The Historic Responsibility of the Catholic Church
Ron Jacobs
The Barbarism of US Immigration Policy
Kenneth Surin
In Shanghai
William Camacaro - Frederick B. Mills
The Military Option Against Venezuela in the “Year of the Americas”
Nancy Kurshan
The Whole World Was Watching: Chicago ’68, Revisited
Robert Fantina
Yemeni and Palestinian Children
Alexandra Isfahani-Hammond
Orcas and Other-Than-Human Grief
Shoshana Fine – Thomas Lindemann
Migrants Deaths: European Democracies and the Right to Not Protect?
Paul Edwards
Totally Irrusianal
Thomas Knapp
Murphy’s Law: Big Tech Must Serve as Censorship Subcontractors
Mark Ashwill
More Demons Unleashed After Fulbright University Vietnam Official Drops Rhetorical Bombshells
Ralph Nader
Going Fundamental Eludes Congressional Progressives
Hans-Armin Ohlmann
My Longest Day: How World War II Ended for My Family
Matthew Funke
The Nordic Countries Aren’t Socialist
Daniel Warner
Tiger Woods, Donald Trump and Crime and Punishment
Dave Lindorff
Mainstream Media Hypocrisy on Display
Jeff Cohen
Democrats Gather in Chicago: Elite Party or Party of the People?
Victor Grossman
Stand Up With New Hope in Germany?
Christopher Brauchli
A Family Affair
Jill Richardson
Profiting From Poison
Patrick Bobilin
Moving the Margins
Alison Barros
Dear White American
Celia Bottger
If Ireland Can Reject Fossil Fuels, Your Town Can Too
Ian Scott Horst
Less Voting, More Revolution
Kevin Zeese - Margaret Flowers
We Are Winning
Graham Peebles
Climate Change, Extreme Weather, Destructive Lifestyles
Peter Certo
Trump Snubbed McCain, Then the Media Snubbed the Rest of Us
Mel Gurtov
Saving Democracy
Dan Ritzman
Drilling ANWR: One of Our Last Links to the Wild World is in Danger
Brandon Do
The World and Palestine, Palestine and the World
Negin Owliaei
Toys R Us May be Gone, But Its Workers’ Struggle Continues
Chris Wright
An Updated and Improved Marxism
Daryan Rezazad
Iran and the Doomsday Machine
Patrick Bond
Africa’s Pioneering Marxist Political Economist, Samir Amin (1931-2018)
Thomas Knapp
Murphy’s Law: Big Tech Must Serve as Censorship Subcontractors
FacebookTwitterGoogle+RedditEmail