Life Insurance Cost

To get the best life insurance deal, you need to avoid common mistakes that are often made. It’s important that the insurance process goes smoothly and quickly. Mistakes can end up costing you money, and you could be taken advantage of. It’s important to be aware of common mistakes so that you can avoid them. Here are some of the more common mistakes made when shopping around for life insurance.

Not Shopping Around
In order for you to get the best deal on life insurance, you need to be aware of what deals are out there. You don’t want to commit yourself to a particular insurance policy and then a month later find a better one. That would be a waste of your time. You can avoid a lot of potential future problems by just taking the time to do some comparison shopping. You won’t need to spend a lot of extra time, and it will be worth it. Be sure and do some upfront research. You could end up being very surprised by what you discover.

Not Comparing Rates
Once you have shopped around, you need to compare rates. It won’t do you any good to shop around if you don’t compare the rates. But don’t just compare the costs. You need to understand what each plan will exactly do for you. You need to know what the coverage is as well as what is not covered. It could turn out that the best insurance plan for you costs more than what you were expecting. Your first priority should be on the coverage.

Not Being Familiar With The Insurance Policy
It is very important to not just get a policy and then instantly forget about it. You need to understand all of the details regarding your life insurance policy. That way if there is ever a dispute that needs to be settled you will already be familiar with your policy. It can also help reduce surprises from arising. Being in control means you will be able to anticipate and respond to whatever might come up. If you don’t become familiar with your policy, you may end up paying too much and unforeseen problems could arise.

Find the best life insurance policy that is best for you and your situation. Be sure you become familiar with your policy and know how to use it. Become familiar with all of the details of the policy and know how it can work for you. The more familiar you are, the better your relationship will be with your insurance company.

Life insurance is an important undertaking. It is more important for your loved ones than it is for you. You want to be sure to get an insurance plan that is helpful to you, but also is one that is affordable. You would like to find an insurance company that will be able to help you with your specific needs. Not everyone has identical needs, so everyone needs to have their own insurance plan.

When you pass away, many financial considerations and fees can arise. For one thing, your funeral will need to be paid for. You don’t want your family to be burdened with the high costs of having to pay for a funeral. You may have debts or bills that you leave behind as well, and your family may need help for paying those bills. If these expenses are not provided for it could end up really hurting your family and loved ones if they don’t have enough money to pay your balances.

Life insurance can either be hurt or helped by the status of your health. If you fail to get a health insurance insurance policy until you are 60 years old, then you will pay a higher premium. Your insurance company will consider you to be a higher risk. In order to obtain affordable life insurance you need to lock into a plan while you are still young. You might not think that you need to have insurance, however if you start early you can save money. However just being young doesn’t mean that you pay less automatically. If you have a chronic disease you might have to pay a higher premium.

There are things you can do to help get yourself better rates on your life insurance. You don’t want to just do nothing and spend a lot of money if it isn’t necessary. If you smoke, you need to do whatever you can to quit. Insurance companies don’t like the risks associated with long term smokers. The same thing applies to being overweight. If you show that you are trying to lose weight insurance companies will be responsive. Losing weight can help you to be healthier. Another thing that insurance companies check for is blood pressure. If you do happen to have high blood pressure you need to try to lower it. Make sure you inform your insurance company when there is an improvement to your health. You should do this each time there is an improvement to show that you are becoming less a health risk to them.

It is very important to have life insurance. It is possible to have a plan that will help you and not destroy your finances. Be sure to shop around. Also do whatever things you need to do to help yourself out. Do whatever you can to be healthier. You will receive many important health benefits, and getting healthier can also save you money on your life insurance premium.

A majority of people know that an individual’s health, age and lifestyle choices are used by life insurance companies for making decisions on whether to offer coverage or not to individuals. An applicant’s information is evaluated and then classified based on their insurance tables. The cost of the insurance premium that the applicant will have to pay is related directly to the classification. How are these tables formulated and how are premium prices derived? This article will discuss how life insurance premiums get calculated.

In insurance terms, risk refers to the probability of a loss. When an individual purchases insurance, risk transfers from the insured to the insurer. On order to accept the risk and still be a profitable business, the insurer needs to estimate how many losses are going to occur. Since the insurer cannot predict what the expected losses will be for any single individual, insurance companies use large numbers to make accurate predictions on how the number of losses that will occur in a group.

There is a basic principle to the law of large numbers. The larger a group is, the more predictable future losses will be in a given time period. Although insurance companies can’t predict which particular individuals will die, studying large groups and using statistics can help to accurate predict how many individuals will pass away.

An item of property or person being insured is referred to as an exposure unit. To make the law of large numbers effective, large numbers of homogeneous or similar exposure units are combined. For health and life insurance, the exposure unit is equal an economic value placed on the insured individual’s life. For other kinds of insurance what is being insured is the number of car, homes and other items.

As exposure units increase, errors for predicting losses decrease. The bigger the group is the closer predicted losses will be to actual losses. Insurance companies deal in averages. If they use average risk, the low and high extremes of loss cancel out.

Insurance companies hire actuaries, or mathematicians, who compile and analyze statistical data concerning risk and exposure units. The data is used for mortality (death) as well as morbidity (sickness) tables which are then used for predicting future losses which are due to death and sickness. The tables also consider other variables which lower or raise risk of loss. An insured individual is classified, and the premiums are based upon where the person’s profile is situated in the tables.

Insurance companies charge premiums to help cover their expenses, predicted losses, and profits. Expected losses are calculated based on past experiences with average risk. It is irrelevant that some people will live much longer than the average life expectancy (paying premiums for a lot longer), because others (who only pay a few premiums) die prematurely. These two extremes end up canceling the other out, which leaves average risk as the basis that the insurance company uses to calculate their expected losses.

Antiretroviral (ARV) treatment is available now along with legislation prohibiting discrimination, helping HIV/AIDS to become just one of many chronic diseases. However HIV-positive status may still provide an obstacle for buying insurance or getting a loan.

Most southern Africa life insurance companies require an HIV test from applicants and will deny coverage for those who do test positive. Financial institutions, without having any life insurance to provide security, are very reluctant to provide loans for starting a business or buying a house.

Amon Ngavetene, AIDS Unit coordinator for Legal Assistance Centre- an organization in Namibia that provides legal advice- said, denying life cover also impacts other rights.

The Legal Assistance Centre is calling on the government of Namibia to pass legislation that will prohibit insurance companies from discriminating on individuals that live with HIV. So far there has been no effect.

Ngavetene added that individuals that were HIV-positive were also discriminated against after they had died as well. Individuals contracting HIV after they have taken out life cover who fail to inform their insurance company risk having their life insurance invalidated when a death certificate indicates the person died of an illness that was AIDS related.

Ngavetene said, an individual might pay for 15 years, but when they die the family doesn’t get a penny. It’s unconstitutional, however it’s hard to challenge due to the fact that it becomes a terms of contract issue.

Botswana insurance companies also require HIV tests for applicants. However Linny Keorapetse, Botswana Network of Ethics, Law and HIV/AIDS legal officer said, there was at least one insurance company, Metropolitan Life, willing to cover individuals that were HIV-positive, although the cost was much higher.

Those who do test negative still are required to be re-tested every five years. A positive result that comes later basically means that the insurance policy gets converted automatically from life insurance to pure savings.

According to Keorapetse, the constitution of Botswana doesn’t provide for any socio-economic rights to act as a basis to form a court case with. All we can do right now is make noise. We say that it’s discriminatory due to the fact that insurance companies only ask for that one medical test. However, riskier conditions do exist.

Botswana’s HIV prevalence rate is second highest in the world. Almost one in every four adults lives with the virus. However its ARV program is one of the region’s most extensive as well. Free treatment reaches about 90 percent of individuals who need it. Keorapetse pointed out that people nowadays who live with HIV can live an additional 20 years when they take treatment.

Ross Beerman, co-founder and managing director of AllLife, a life insurance company in South Africa, decided that instead of discriminating on individuals that live with HIV, decided to capitalize on the market gap and specialize in offering individuals that are HIV-positive with life cover.

Beerman said, our operating model is very different. With a standard model, price policies are formed on the basis of historical behavior. What we do instead is use forward looking behavior for setting our prices. If you are HIV-positive, how you might have behaved in your past isn’t something we care about. What we do care about is that you stay healthy into the future.

AllLife policyholders are required to get blood tests done regularly and to start ARV treatment whenever their CD4 count, which measures the strength of an individual’s immune system, goes below 200. When a person starts on ARV treatment, AllLife monitors closely the client’s adherence via health care providers as well as text messages sent via cellphone to remind about appointments and send warnings when if they are missed.

Insurance premium costs are two to five times more expensive than a normal life insurance policy. The average monthly payment is around $40 US and buys about $40,000 of coverage. It can be used for starting a business or securing a home loan.

It does appear that being a policyholder does have positive health effects. Beerman said, just from being clients of ours they go for regular monitoring. After six months they get healthier by approximately 15 percent. They realize they can impact their longevity by starting to behave in healthier ways.

HIV-positive individuals living in Bostwana, in contrast, are advised they should join burial societies or steered in the direction of funeral policies. There aren’t any companies currently offering life insurance for people that are HIV-positive, Keorapetse said.

In order to function efficiently, AllLife does rely on IT and administrative systems that are fairly sophisticated. In countries that are less developed in the region they would be harder to be replicated. As an example, there are places where blood tests results aren’t captured electronically.

Beerman said, people who live with HIV should have a right for participating in the mainstream economy normally.

The CDC (Centers for Disease Control and Prevention) published a survey recently of the states that were most obese in the U.S. Most of the top ten of the fattest states were Southern states, due to the specific dietary habits of the region. There is a greater likelihood for people in Southern states to eat fried and high fat foods, which are contributing factors to obesity. The states with the highest rates of obesity also have the premiums for life insurance. This is not surprising since obesity is linked to a number of fatal diseases and ailments.

Using the body mass index (BMI), the CDC found the highest percentages of obese people in the following states: Mississippi (32%), Tennessee (30.1%), Alabama (30%), Louisiana (29.8%), West Virginia (29.5%), Arkansas (28.7%), South Carolina (28.4%), Georgia (28.2%), Oklahoma (28.1%) and Texas (28.1%).

So why are life insurance premiums higher if you are considered overweight? When a life insurance company underwrites an insurance application your physical build is factored into their consideration. Your weight and height measurements are used to help determine which of the rating categories you fall in. Insurance cmpanies usually will use the applicant’s BMI. The BMI is calculated by dividing weight in kilograms by height that is measured in meters squared. Individuals who have high BMI’s (the normal range is considered to be 18.5 to 24.9), will be still be eligible for life insurance but will not qualify for the best premiums. This is because obesity can shorten an individual’s life which makes them a higher risk for a life insurance company. Obesity can contribute to: some cancers, strokes, heart disease, high cholesterol, type II diabetes and hypertension.

The purpose for having a life insurance policy is to ensure that your family will not have the financial burden of having to pay for your final expenses and medical bills.  Your loved ones shouldn’t have to worry over taking care of the bills that you might leave behind when you die.  However, what about if you are the one trying to deal with losing someone and the individual’s life insurance doesn’t cover all their final expenses?  If you are in the situation of having to deal with the death of a parent or spouse and their life insurance policy doesn’t cover all their final expenses, you may be feeling that you don’t have other options.  However, there actually are a few things you can do in this situation.

The first thing you should do is double check the insurance policy.  You will need to ask for a copy of the individual’s life insurance policy along with a copy of what they paid out.  Most likely the insurance company did pay the amount they were supposed to.  However, you don’t know that for sure.  A mistake could have been made and a claim needs to be made on the money.  You should always check the insurance policy to make sure the proper amount of money was received.

The next thing you should do is get an attorney who can assist you in determining what bills you may be legally responsible for.  When a loved one dies there could be many different bills that need to be paid, but there could also be situations where you will not be required to pay any money.  Don’t talk to the bill collectors, as they will most likely tell you that it is your responsibility to pay everything.  That is why you want to have a lawyer, so that you can gain a good understanding of which bills you in fact are responsible for as well as the ones where you have no legal obligation for paying.

Once you determine which bills you are responsible for, there are several options available to you.  The first option available to you is to apply for assistance from the government for certain bills or portions of the bills.  The government has several programs that you may be eligible for to assist you with paying some of those bills that you need to pay.

One other option you have is to speak with the companies and bill collectors on an individual basis.  Some companies have their own set of policies that can help you in settling the debts.  Sometimes they may clear part or most of the debt away.

For the most part companies do a good job of taking care of these things.  If they are unable to clear the debt they may set up a payment plan for you so that you do not have to pay the entire bill all at once.  This should make things a little easier for you to deal with.

It is hard enough trying to decide between term and whole life insurance.  If you choose whole life insurance there will be even more decisions that you have to make.  Whole life insurance is not just coverage to protect your family in the event of your disability or death.  Most whole life insurance policies are investment vehicles as well that allow you to accumulate cash value in your policy to be used in the future.  Some of these policies even pay dividends.

Here is a brief breakdown of the different whole life insurance policy types that are currently available.  The two major whole life insurance categories are non-participating and participating.  Within these two main categories there are these whole life insurance sub-categories.

Level Premium
Life insurance premiums typically increase the older you get to cover the increased risk of you dying.  A level premium policy provides you with fixed premium payments for the entire life of the life insurance policy.  You will pay higher premiums in the early years than you would if you had a traditional whole life policy.  The extra premium cost, including the interest earned on the excess, will help to make up later on when the amount you are paying for your premium is less than the yearly cost for your insurance.  Your insurer invests the extra premium amount which adds to the cash value on your policy.

Limited Payment
On a regular whole life policy, you pay premiums for your entire life or for as long as you want the policy to be valid.  A limited payment policy offers coverage for your whole life but only requires a limited number of policy payments.

Because you will not be paying for premiums for your entire life, the amount that you do pay will be higher.  However, this option can be a good one if you want to make sure you have coverage later in life without having to afford or pay the premiums then.  A limited payment premium can be based on a certain number of fixed years, for example 10 years, or it could be based on your age such as paying premiums until the age of 65.

Single Premium
A single premium policy is a limited payment policy taken to the extremes.  You pay for the entire policy in one installment when the policy is issued.  Because the amount paid on the premium will be quite substantial, the policy will have immediate loan and cash value, so it is usually considered to be an investment.

Indeterminate Premium
This type of policy may also be referred to as an adjustable premium.  It requires that you pay premium payments for your entire life or for as long as you want the policy to be valid.  Your premium payments are usually less during the early years due to the fact that your current premium is based on your life insurance company’s estimate of your earnings, expenses and mortality.  The cost of the premium changes as these estimates change.  An indeterminate premium policy will state a maximum premium that can’t be exceeded over the policy’s life.

People have a lot of misconceptions regarding the different forms of life insurance.  A lot of the confusion that people have has to do with the complex language used to describe life insurance.  One example of this is whole life insurance.  Most younger people do not realize just how much whole life insurance can benefit them due to their age.  Younger people usually are not aware of the other types of benefits that whole life insurance can offer.

So how can it be beneficial to purchase whole life insurance when you are younger?  The first thing that you need to realize is what whole life means is that the coverage that is provided by your insurance plan will continue even after you have reached retirement age or older as long as you continue to pay your insurance premiums on time.  However, when you buy your policy when you are younger, the life insurance costs are spread over a lot more years which helps to reduce the yearly cost of your insurance premiums.  The whole life insurance policy will accrue interest on an annual basis, which adds to its value.  So as you can see, having the extra years that youth gives you will allow the value on your insurance policy to accumulate more value than if you bought it when you were over the age of 60.

If you are still young and relatively healthy, hopefully you will not need to worry about potential health problems for quite a few years.  You may have an awareness of some potential future health problems as you age due to a family history with specif health issues and diseases.  However, it is impossible for us to predict just exactly what our state of health will be in ten, fifteen or twenty years from now.  The main thing that you don’t want to happen is to be in a position where you are older and therefore less insurable and having to pay for medical expenses from the nest egg that was supposed to be for your retirement.

Whole life insurance can protect you from unplanned expenses due to unforeseen health problems that otherwise could use up all of your retirements funds during a time when you want to be able to enjoy all of the years of hard work and savings.  In addition, whole life insurance provides you with a guaranteed death benefit that will be paid when you pass away.  When you are young, you may not want to think about your mortality.  However, none of us really knows just how long we will be here.  Preparing yourself financially for the time when you will no longer be here will free you to enjoy your life without having to worry about the rising costs for funeral and burial expenses, as well as the wish to be able to financially take care of your loved ones after you are gone.

You may have the mistaken belief that due to the fact that whole life insurance provides comprehensive coverage as well as lifetime benefits means that it isn’t affordable for someone young, and especially if you are raising a family.  However, this is not true.  With the present state of our economy, there are many people just struggling to try to make it.  If you are in this situation you might question whether or not it makes sense for you to spend money on a whole life insurance policy during these hard economic times.  Of course this concern is valid.    However, just think about the even greater financial hardships that your family might be faced with if anything happens to you.  How would your family be taken care of if you were no longer there?  Protect your loved ones and give yourself the gift of reassurance that protecting your loved ones using whole life insurance will afford you.

If you are married or have children, then you should seriously consider term life insurance.  You definitely want to make sure that your family is taken care of and protected in the event that you should die prematurely, particularly if you are the household’s breadwinner.  Although term life insurance does not build up any cash value over the time you are paying your premiums, it does provide a significant amount of coverage in the event of your death for your loved ones.  The death benefit proceeds from your term life insurance policy can help to pay your funeral expenses, medical bills, and provide your family with a financial cushion during the time of grief and loss.

In fact, term life insurance is the simplest type of insurance in existence.  The purpose of term life insurance is to provide affordable and temporary life insurance coverage for individuals and families who are on limited budgets.  This form of insurance is affordable for most people.  For a 30 year old healthy and nonsmoking male, the typical cost is about $2,500 a year for a $50,000 death benefit.  As you get older the cost of  your premium will increase as well, but only when the term on the policy expires.  When it comes to term life insurance, the premium price is set when you originally agree to the term.

What many families who are trying to pay their mortgages and other debts off will do is buy a term life insurance policy as backup just in case anything should happen to either spouse during the time they are trying to pay for the mortgage or debt.  In today’s economy, a majority of households can barely meet their living expenses on the two incomes.  That is why life insurance coverage is a necessity in case the family loses one of these incomes due to death of one of the spouses.  One of the other main reasons why people  may invest in a term life insurance policy is to ensure that their children and spouse are provided for.  Many parents obtain term life insurance when they are raising their children and then allow the term to expire when their children go to college.

Although term life insurance is very beneficial in the event you should pass away, it is not intended to be a long term investment due to the fact that it doesn’t accumulate cash value.  The major purpose for term life insurance is for covering the financial responsibility of the insurance policyholder should they die.  The death benefit proceeds can be used to pay funeral expenses, cover any outstanding bills and supplement the income of the family while they are in their period of adjustment.

If you happen to be a healthy individual who doesn’t currently have any life insurance, then you should strongly consider buying term life insurance.  This will provide you with the peace of mind knowing that your loved ones and family will be well taken care of in the event that you should die.  While it is true that losing a member of the family can be quite devastating, you don’t want to add on financial burdens such as funeral expenses, debt and loss of your income on top of their grief and loss.  Investing in term life insurance provides you with the assurance that your family will be provided with the death benefit from your life insurance policy if you were to die within the term on your policy.

Following the collapse of the mortgage business last year, investment banks on Wall Street started looking for a different way for making money. They think that they just might have found one. Bankers are planning to purchase life settlements. These are life insurance policies elderly and ill people sell for $400,0000 to one $1 million in cash, depending on what the insured person’s life expectancy is.

The bankers plan to securitize the insurance policy. What this means in the jargon of Wall Street, is packaging hundreds or even thousands of these policies together to issue bonds. These bonds will then be resold to investors, such as the large pension funds, who will then receive the death benefits when the insured person dies.

The sooner the policyholders dies, the higher the return will be. If the insured individuals end up living longer than is expected, the investors could wind up with low returns or could even lose money.

Wall Street would end up profiting either way by pocketing the large fees they would receive from creating, reselling and then trading the bonds. However, some experts who have analyzed life settlements are warning that insurance companies in the short term may need to raise premiums if they wind up paying out more in death claims than was anticipated.

The idea of turning life settlements into bonds is still only in the planning stages, but our phones are already ringing off the hook with questions, said Kathleen Tillwitz, who is a DBRS senior vice president. DBRS is the company that provides risk ratings for investments and is in the process of evaluating nine different proposals for the securitization of life insurance from private investors as well as financial firms, which includes Credit Suisse.

One investment banker, who did not have the authority to speak with the news media, said we are hoping after the first offering to get a herd stampeding.

Following the financial meltdown of the economy, the exotic investments that had been created on Wall Street received a lot of the blame. It was an array of financial products and not just sub prime mortgage securities, including structured investment vehicles, credit default swaps and collateralized debt obligations that all proved to be much risker than had been originally anticipated.

The financial collapse gave all of this financial creativity a bad name in general, but it didn’t carry over to Wall Street. While Washington continues to debate the need for increased financial regulation, the investment bankers are busy concocting new financial products.

In addition to proposing that life settlements be securitized, some banks are repackaging some of their poor performing securities into ones with higher ratings, calling them re-remics. These are the re-securitzations of mortgage investment conduits. The investment firm Morgan Stanley states that a minimum of $30 billion of residential re-remics were completed this year.

Financial innovation can theoretically be a good thing in terms of lowering borrowing costs and providing consumers with additional investment opportunities, and in general help the economy to grow and expand. Those in favor of securitizing life settlements claim it would benefit individuals who would like to cash out on their insurance policies during their lifetime. However, others are very dismayed by the quick return of Wall Street to its old ways of chasing after profits with complex new financial products.

James D. Cox, a Duke University professor in corporate and securities law, says it is bittersweet. The sweet part of it is that there are investors who have an interest in the exotic products that underwriters create. The underwriters earn large fees while the rating agencies are getting paid to provide ratings. The bitter part of it is that it’s a return back to the good ole days.

What may be good for Wall Street may end up being bad for both the insurance companies as well as their customers. This is due to the fact that policyholders often end up allowing their life insurance policies to lapse before dying. This happens for a variety of reasons, including children growing up and not needing financial protection any longer, or the insurance premiums get too expensive for seniors to afford. When this occurs, the insurance company isn’t required to pay out.

However, if the insurance policy gets purchased and then gets packaged in with a security, then investors will continue to pay on insurance premiums that may have previously been abandoned. This could result in more policies staying enforced, which would result over time in more payouts and less profits for insurance companies.

Neil A Doherty, who is a Wharton professor who has analyzed life settlements, says when the insurance companies set the premiums they based them on wrong assumptions. He added that insurance companies would probably need to raise the cost of premiums on new life insurance policies if widespread securitization occurs.

Steven Weisbart, who is chief economist and senior vice president at the Insurance Information Institute, states that life settlement critics believe it defeats the major purpose of what life insurance is intended for. It is not an investment or gambling product, he added.

After Mortgages
Wall Street, undeterred by the critics, is racing ahead with their idea for one simple reason. There is $26 trillion worth of life insurance polices that are in force in the U.S. It could be a huge market.

Of course not all life insurance policyholders are going to want to sell their policies. In addition, investors will not be interested in the policies of healthy people because the premiums would have to be paid for too long, which would reduce the profits on their investment.

However, even if just a small fraction of life insurance policy holders were to sell their policies, there are some industry analysts predicting that this market could be a $500 billion one. This would aid Wall Street in offsetting losses in revenue due to the collapse of the market for U.S. residential mortgage securities, which is down from a high of $941 billion in 2005, down to $169 this year so far, according to the firm Dealogic, who tracks financial data.

There are some financial firms on the move and looking to over run their competition. For example, Credit Suisse is effectively building up a financial assembly line of sorts in order to purchase large quantities of life insurance policies and then package and resell them in a similar way that the Wall Street firms packaged and sold sub prime securities.

Credit Suisse purchased a business that does life settlements originations and has also set a group up for structuring deals along with another one for selling products.

The investment firm Goldman Sachs has created a life settlements tradable index, which enables investors to place bets on whether individuals will die sooner than what was planned or live longer that what was expected. Their index is very similar to a stock market index that enables investors to place bets on the market’s overall direction without purchasing stocks.

If Wall Street is successful in turning life insurance policies into securities it would transform this controversial business of purchasing and selling life insurance policies, which on a smaller scale has existed for a few decades, into something much bigger.

Those who defend life settlements make the argument that having a market in place which allows the elderly or ill to sell their life insurance policies for cash is actually a public service. They make the argument that insurance companies only offer a cash surrender value which is typically just a fraction of what the death benefit is when policy holders want to get a cash out, even though they have paid large premium amounts for years.

This is where life settlement companies enter in. Depending on a number of different factors, a life settlement company will pay anywhere from 20-200% more than what the cash surrender value is that the life insurance company will pay.

However the life settlement industry has been haunted by persistent complaints of fraud. State insurance regulators, who are hamstrung by a hodge podge of regulations and laws, have been critical of life settlement brokers for trying to coerce the elderly and ill to take policies out just so they can resell them to the brokers. This type of life insurance is often referred to as stranger-owned.

In 2006, Eliot Spitzer, when he was the attorney general for the state of New York, sued Coventry, which is one of the biggest life settlement companies. He accused the firm of participating in bid rigging with their rivals in order to keep prices low that were offered to individuals who were looking to sell their life insurance policies. This case is still continuing.

Stephan Leimberg, who co-authored a life settlements book, said when testifying last April to a Senate Special Committee on Aging that life settlement predators, if they are left unchecked by regulators, legislators and the life settlement industry, have the means and motive to take advantage and exploit seniors.

Predictions Can Be Tricky
In addition to the problem of fraud, there is another risky potential for investors. That is the possibility that some individuals could end up living a lot longer than was expected.

This risk is not just hypothetical. It occurred during the 1980s when new treatments for AIDS became available and prolonged AIDS patients’ lives. Investors who had purchased their life insurance policies with the expectation that a majority of AIDS victims would most likely die within two years wound up losing money.

Last fall it happened again when the companies that estimate life expectancy found that people were indeed living longer.

Wall Street’s challenge is to find a way to make life insurance policy securities safe and more predictable investments. In order to interest large investors, any securitized bond needs a seal of approval from one of the credit rating agencies which measures the risk level.

Banks are, in many ways, trying to duplicate the sub prime mortgage securities model. These securities became popular after the rating agencies gave them a triple A top tier rating. While an individual mortgage that belonged to a home buyer that had bad credit would be considered to be a risky investment due to the strong possibility of a default, packaging many of these mortgages in a bundle helped to limit the risk. At least that is how the theory went, which depended on the fact that were would not be a lot of defaults occurring all at once.

In retrospect that idea was seriously flawed. However, Wall Street seems convinced they can solve the problem with life settlement policy securities.

This is the reason why Goldman Sachs and Credit Suisse bankers have visited DBRS, a rating agency located in lower Manhattan that is not well known.

In 2008 DBRS published criteria that offer ways of securitizing a life settlements portfolio that minimized the risks.

Interest came flooding in. For example, hedge funds that have purchased life settlements are eager to buy and sell these policies more readily, so they will be able to cash out on the non profitable investments and keep the profitable ones. Wall Street banks, which were beaten down during the recent financial crisis, have been looking for ways to get going once again with their securitization machines.

Ms. Tillwitz, who is a DBRS executive overseeing the project, stated that DBRS spend a period of nine months becoming comfortable with all of the risks that are associated with providing a rate for a life settlements pool.

One question is whether there could be a way to protect against agents committing possible fraud through purchasing life insurance policies and then reselling them to circumvent problems that occurred with sub prime mortgages where some of the brokers made fraudulent loans which ended up in the securities packages there were sold to investors. The question being how could investors have assurance that the life insurance policies were acquired legitimately so that there would not be disputes on the payouts at the time of the original policyholder’s death.

Another question was how to ensure that the policies that were purchased had been obtained legally, since some states prohibit selling the policies until after a period of two to five years?

Risk Spreading
In order to further understand how these risks could be managed, Ms. Tillwitz along with Jan Bucker, a colleague with a PhD degree in nuclear engineering and mathematics wizard, traveled around the world to visit with firms that manage life settlements. Ms Tillwitz stated that they didn’t want to rate deals that ended up blowing up.

So what was their solution? Ideally a life settlements bond would contain policies from individuals that had a range of diseases such as lung cancer, leukemia, heart disease, diabetes, breast cancer and Alzheimer’s. The reason for this is, for example, if there were too many leukemia patients in the security portfolio, and then there was a cure that was developed, the bond’s value would plummet. Another precaution that DBRS would take would be to run a background check on the issuers and include a quality range of life insurers.

Mr. Buckler tested how different policy mixes would perform by running computer simulations in order to demonstrate what would occur to the returns where people lived much longer than had been expected.

However, even with a mathematical wizard calculating all the possibilities, there are some risks that cannot be predicted. How can computers make accurate predictions on what might happen if, for example, health reform were to pass and large numbers of Americans had better care which resulted in people in general living longer? Or what if some sort of magical cure for all forms of cancer was invented?

If these computer models ended up being wrong, the investors might wind up losing lots of money. Some of these assumptions might appear to be unlikely, but effectively that is what occurred with a lot of the sub prime loan securities that had been given triple A ratings.

The investment banks selling the securities tried to lower their risk through doing things like packaging mortgages that came from different regions and had different borrower credit levels. The assumption was that if housing prices fell in one area, for example Florida, which resulted in widespread defaults, it wasn’t likely that the housing prices would end up falling at the same exact time over in another region, such as California for example.

Economists made note of the fact that historically speaking housing prices had dropped on a regional but not national basis. When the housing prices did drop nationwide, the investors ended up losing hundreds and hundreds of billions of dollars.

Moody’s and Standard & Poor’s, who both gave many of the triple A ratings out, after getting burned are now approaching the life settlements issue more cautiously. In the 1990s Standard & Poor’s rated Dignity Partners but has declined to comment on what their plans are regarding life settlements. Moody’s says that financial firms have approached them who are interest in the prospect of securitizing life settlements but state that they haven’t seen a portfolio yet that meets their standards.

Investor Interest
Even with the mortgage debacle still fresh in their minds, there are investors that are intrigued by the idea. One of these investors is Andrew Terrell, who was the co-head at the mortality and longevity desk at Bear Stearn’s. The desk traded life settlements portfolios that were unrated. He later worked at Institutional Life Companies, which was a Goldman’s Sachs’s venture introducing a life settlements trading platform. Mr. Terrell believes that securitized life insurance policies do have a lot of potential and that investors who are looking to spread their investment risks are always on the look out for new types of investments, particularly ones that don’t move in the same direction as the other investments in their portfolio.

Mr. Terrell said it was an interesting asset class due to the fact that is has less correlation to the market as a whole than other types of asset classes.

Some of the academics studying the securitization of life settlements do agree that it appears to be a good idea. There is one difference that they agree on. That is death has no correlation to stocks rising and falling.

Joshua Coval, who is a Harvard Business School professor in finance, states that the risks of these assets are not hard to estimate and for the most part they don’t have exposure to the broader economic risks. He added that tranching and pooling doesn’t amplify the systemic risky of the underlying assets.

In the meantime, the insurance industry is gearing up for a fight. According to Michael Lovendusky, who is associate general counsel and vice president for American Council of Life Insurers, said while mortgage providers have all been tainted by sub prime mortgages, there is also the concern that life insurance companies would all become tarnished by sub prime life settlements.

The insurance industry might find an ally in the government. In April during the Senate committee hearing insurance regulators from the states of Illinois and Florida were among those who were expressing concerns regarding life settlements, arguing that the current regulations were inadequate.

Herb Kohl, Democratic Senator from Wisconsin and the Special Committee on Aging chairman, stated that securitizing life settlements adds yet another element of potential risk to the industry that already needs enhanced regulations, consumer safeguards and more transparency.

DBRS states that they agree that this needs to be looked at carefully. Ms. Tillwitz stated they wanted the life settlements market to flourish safely.