Insurance: New lease on life
The secondary market in life-insurance policies is good for consumers
AFTER savings accounts and government bonds, life insurance may be the most respectable of investments. It was not always so.
Until the British parliament passed the Gambling Act in 1774, which banned policyholders from insuring the lives of people
with whom they had no documented connection, many life policies were straight bets on whether somebody—a member of the royal
family, say—would live or die.
Now, in a faint echo of those times, a secondary market in life-insurance policies is growing rapidly in the United States.
Firms buy policies, mainly from older people, at discounts to their face value. They pay all subsequent premiums and collect
the proceeds on the death of the insured or the maturity of the policy. Such “lifesettlement” firms bought $2 billion-worth
of policies (by face value) last year, ten times as much as they acquired in 1998. The industry's potential—Americans aged
over 65 have life cover worth perhaps $500 billion—has attracted such investors as General Re, a subsidiary of Warren
Buffett's Berkshire Hathaway.
Hitherto, elderly Americans with policies they do not need or cannot afford to keep up have had little option but to let the
policies lapse or sell them back to their insurers. Plenty seem glad to have an alternative buyer. No wonder, when on average
they can get three times as much from life-settlement firms as they can from their original insurers.
However, the life-settlement business still has to overcome several obstacles. One problem is that its reputation is tainted
by association with the viatical industry, which bought the life-insurance policies of the terminally ill, usually with AIDS,
and in which fraud was common.
In addition, some life insurers see the life-settlement business as a direct threat. Should the secondary market expand, the
proportion of policies that lapse—and on which insurers pay no claims—would drop. Insurers would then have to pay more out.
Their profits would fall and premiums would probably rise. So a handful of lifeinsurance firms are trying to hamper the
life-settlement firms' growth by prohibiting their insurance agents from discussing them with clients and by making policies
nontransferable.
The legality of such moves is not clear. It is not certain, says Rick Cortese of National Regulatory Services, a consulting
firm, that insurance agents have a fiduciary duty to their clients, as brokers selling securities do—or, if they have such a
duty, whether it obliges them to discuss life settlements. New rules being drafted by state insurance regulators would
explicitly allow agents to talk to clients about life settlements, but would not insist on it. On the transferability
question, some states permit insurers to write policies that cannot be sold on. Others, such as North Carolina, Florida and
Louisiana, do not.
The economic argument, however, is plain. Before the life-settlement industry grew, life-insurance companies were the sole
buyers of unwanted policies. Now consumers have a choice, and the chance to get more if they cash their policies in. And so
what if the life-settlement firms profit from their death? Unlike their 18th-century forebears, the policies' buyers have at
least asked permission.
What is a Life Settlement? 
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