Not content with bundling mortgages and credit card debt, Wall Street bankers plan to profit from buying life settlements, payments that ill and elderly policyholders in serious need of money receive by selling their life insurance policies for cash.
Bankers would then securitize the policies by packaging hundreds or thousands of them together into bonds they sell to investors who will receive payouts when the policyholders die.
The earlier policyholders die, the bigger the payoff; if they live longer than expected, investors could get poor returns or even lose money.
Either way, Wall Street would profit by pocketing sizable fees for creating the bonds, reselling them, and subsequently trading them.
The fact that the scheme is still on the drawing board hasn’t dampened interest.
“We’re hoping to get a herd stampeding after the first offering,” an investment banker not authorized to speak to the news media told The New York Times.
DBRS, which gives risk ratings to investments, is already reviewing nine proposals for life-insurance securitizations from private investors and financial firms.
However, some who have studied life settlements warn that insurers might have to raise premiums in the short term if they end up having to pay out more death claims than they had anticipated.
Life settlements represent an estimated $12 billion annual secondary market for life United States insurance policies, MarketWire reports.
Life settlements already play a significant role in the asset allocation strategies of leading banks, financial institutions, insurance companies and mutual funds.
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