Money and Your Life: Investors Bet on Mortality

Oct. 18, 2009— -- Fresh off the meltdown of the mortgage business last year, Wall Street's bankers have found a new way to make money: the buying and selling of life insurance policies belonging to the sick and elderly.

Advocates of these "life settlements" call them a valuable option for people who want or need money before they die. Critics call it a morbid and risky business that proves Wall Street hasn't learned from the mistakes of the past.

After Dr. Eddie Powell lost both his legs to a hospital infection, he desperately needed financial help to support his practice and two children in medical school.

"I had to get the money, you know, for my family to survive," Powell said.

Powell says he sold three life insurance policies valued at nearly $1 million for $150,000.

"I didn't know if I was going to be able to work. Heck, I didn't even know if I was going to live," Powell said. "I needed the money pretty desperately. I had bills to pay."

Coventry, a life settlement company, bought Powell's policies, bundled them with others and sold them to investors like banks or hedge funds. Those investors continue to pay Powell's premiums, hoping to cash in after he dies.

Life settlements have been around for years as an option for those looking to cash in on their life insurance before they die.

The insured sells a policy to an investor for two to three times the cash surrender value they'd get from the insurance company, and the investor continues to pay the premiums. The sooner the insured dies, the more money the investor makes.

Life settlements got their start in the 1980s during the AIDS crisis when investors bought up the policies of patients expected to die within two years. The insured received money for improving their quality of life, and the investors seemed certain to earn a hefty profit in a short period of time.

But when new medications prolonged the life of AIDS patients, many of those investors lost money.

The subprime mortgage crisis began when banks gave loans to people who couldn't afford them, but it got much worse when Wall Street started betting that those loans would go bad. The practice created a demand for more and more subprime loans.

If Wall Street creates a demand for more life insurance policies, some worry that shady brokers will fill it by preying on seniors and investors.