Wednesday, September 9, 2009

Life Settlement



The crash of subprime mortgage securities is still fresh in mind. Well, the great bankers are heading to a new product that could bring them back to profit like before. Guess what is in their mind this time? Plantation? Technology? F & B? No, no, no. The meat they want is life insurance.

What is life settlement?
In US, many ill and elderly person default on paying premium on their insurance policies as they counln't afford it anymore or their families do not need the insurance payout during the death of the elder or premium might become too expensive.
In the past, dying people lapse the policy and insurance companies making more money as there is less payout.
Now, there is a new option for the ill and elderly people. Investment bankers planned to established a market where the ill and elderly people can sell their policy for cash.
The investment bank will bought over the policies and continue to pay premium. Then, the policies will be "securitized" into bonds or other collateralized securities. These would then sell to investors.

How to define Profit or Loss?
Most people know that the cash value in an insurance policy is less.
^For example, a policy cover up to $1million of payout may have cash value of $100,000.^
So, the premium are to be paid continuously until the insured (the ill and elderly seller) reach a condition to entitle for payout (mostly is death).
If the insured die very soon and less premium being paid, then the investors will make profit from their investment.
If the insured die after many years where a huge amount of premium being paid, then the investors will make loss from their investment.
Profit or loss is greatly depend on insured life expectancy.

Advantages of life settlements
1. Creating a platform for ill & elderly people to sell their policy for cash in case they don't need it anymore. (20 to 200% higher than the surrender value)
2. Investors had got a new type of investment vehicle. ( The market for life settlement has less correlation with the market and the overall economy. Systemic risk will be minimum)

Conclusion:
Life settlement is nothing new, but the investment banks such as Credit Suisse and Goldman Sach had eyed on the $26 trillion life insurance market in US alone. By creating a new market, Wall Street investment bankers (the big conman) can again make sky-rocketing profit from creating the bonds, selling them, and in the end trading them.
In the long run, the payouts by insurance companies become higher and the premium would rise subsequently. In other words, layman like us would suffer for paying higher premium. Let's pray that this investment vehicle doesn't come to Malaysia. ><>

For more info, click here.

2 comments:

Anonymous said...

LIFE IS A BIG STRUGLE
LIFE IS FULL OF SORROWS AND PAIN
LIFE IS FULL OF STORM RAIN (HANJU)
LIFE IS NOT BED OF ROSES
LIFE IS A BIG TROUBLE
LIFE IS A BED OF THRONS

Adrian D'Cruz said...

Your Post is very useful, I am truly happy to post my note on this blog . It helped me with ocean of awareness i really appreciate it.
life settlement

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