Thursday, January 24, 2008
In response to your comment on my previous post, I absolutely hear your concern, and I share it. That is the critical balance that we must decide going forward, is an interest in mortality something that should be salable in the market, or is a "death bond" more like human organs, where for the sake of policy, we simply do not want to allow them to be sold. (For a fun read see Elisabeth Landes & Richard Posner, The Economics of the Baby Shortage, 7 J. LEGAL STUD. 323 (1978).)
Anonymous makes a great point, just pick up Dukeminier, et al. on Wills, Trusts and Estates, your family members are much more likely to "do you in" than an investment banker on Wall Street. But setting the statistics aside, the real issue is whether or not it should be the government's role to tell you who to trust.
Here's another piece to consider, there is a split among the states on the issue of whether you can sell the contract rights to the death benefit on the life policy that you own on the life of someone else. For example, I can take out a life insurance policy on my husband, because I have an insurable interest in his life. However, not all states think I should be able to sell my interest in *his life* to a third party without his consent, though, amazingly, some do.
Perhaps you would prefer the approach that requires the insured (not necessarily the policy owner) to consent to have the interest in his life sold to a third party, and then again if that interest was securitized. However, now we seem to be putting restraints on alienation that are not only potentially costly to enforce, but which may be difficult to factor into pricing. If consent is required, then the investor is actually purchasing an option rather than a pure asset.
My feeling is that life settlements and securitized pools of them, should be allowed. As long as the parties involved understand what they are doing, the practice will bring an increase in competition to a market that has unduly favored insurers. With a life settlement, consumers have another option with which to derive value from their assets. On the other hand, the corollary to an increase in life settlements is a decrease in policy lapse. Since lapse is figured into premium structures for insurance rates, insurers may have to increase premiums in order to account for this change in their expected cash flows (several already have). With an increase in premiums, it becomes more costly to procure insurance, which may dissuade a would-be insured from taking out insurance in the first place. As we still favor insurance from a policy perspective, this may be another reason to restrict life settlements.
How best to restrict the market place is not a question I am qualified to answer. So if anyone has ideas, please share. It is a fascinating web of issues, though, and something worth having on our radar.