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.
Gambling on Death
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.
Another Meltdown in the Making?
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.
'Life Settlements' Called a Morbid BusinessA group of investors in Upstate New York are suing their financial planner, claiming he lost their money after convincing them to invest with a Florida company selling life settlements.
In 2004 that company, Mutual Benefits Corp., was shut down by the Securities and Exchange Commission after federal investigators uncovered a $1 billion ponzi scheme.
"I didn't understand that these people had to die before you got your money," said Nancy Scott, who said she was convinced to put all of her retirement savings in life settlements. "I wasn't investing in a person's death, or betting on it. To me, I was investing in the quality of a terminally ill person's life. "
But several years later, the people Scott and others invested in are still living, or may not even exist. Several former top officials at Mutual Benefits Corp. are in prison, including a doctor who was convicted of misrepresenting the life expectancies and medical histories of the people listed on the policies.
"Supposedly when she dies, then I'll get $102,000. But I don't even know if this woman is really 89, I don't know if she's sick," said Carol Tonzi, another investor involved in the suit.
Scams aside, critics warn that if enough people have a financial interest in death, everyone's health could suffer.
"As sure as night follows day, people who have bets on early death, will find themselves lobbying against effective health care," said Michael Greenberger, a former commodities trading regulator. "There's no two ways about it, this is an accident waiting to happen in terms of investment."
"The 'ick' factor is certainly there and we are aware of it," Life Insurance Settlement Association president Russel Dorsett said. "Basically, mortality, morbidity is a multitrillion dollar market."
In the past five years, around $40 billion worth of policies have been sold, which Dorsett said is a tiny percentage of the multi-trillion insurance industry and too small to pose a risk to the system.
On the contrary, he said the industry provides a valuable financial tool for those who can't afford or no longer need their life insurance.
'Life Settlements' Called a Morbid BusinessMartin Katz said that since he sold his father's life insurance, he's actually relieved that a stranger, not him and his siblings, is the one betting on his dad's early death.
"It doesn't trouble me at all, no. The insurance companies are in that business every day," Katz said. "The difference is they're not betting on or against someone they know.
Katz said that someone from the company now holding his father's policy calls him every several months to check whether his father is still alive. When the family sold the policy, Katz had the option to specify that he receive the call rather than his father.
Down in North Carolina, it is Powell who receives a call every few months. He said he plans on answering the phone for a long time.
"I think my grandma lived to be 113 years of age," he said. "You've got a long time before Eddie Powell dies."