Buying TERM LIFE INSURANCE on someone

[Sarah in SC]

Freebird, y'all need a trust set up for this, so the kids don't kill you for the money.

 

[quietman]

What's the alternative? dh2b can leave the money to the kids, then you have to hope you have enough in your own name to survive. dh2b can leave everything to you no strings attached, and the kids have to hope you don't remarry or become overly fond of the local home for stray cats.

Many people end up with trusts for this. You get use of the money for your lifetime, then the kids inherit. It's pretty common and unless you have creepy step-kids, most people don't find the concept overly creepy.

 

[freebird5825]

Freebird, y'all need a trust set up for this, so the kids don't kill you for the money.

We actually used direct beneficiary designations for his assets, share and share alike, for now.
I have my own independent trust, which covers his needs, but does not include his offspring.
Sounds mean, but their most positive perception of me is the "rich woman" and I certainly wouldn't want to reinforce that, now would I?
I have no kids, so that is where the imbalance lies. My trust attorney already gave me the most optimal path for our situation when I did my trust last year.

 

[easysurfer]

I think there is always a bit of a "creep factor" in life insurance no matter what. Though I do understand it's value (such as a breadwinner leaving life insurance for
the surviving family members).

Insurable Interest link: http://www.insurance.com/faqs/lifefaqdetail.aspx/index/9

 

[haha]

and also was in a bad car crash caused when his carotid arteries were so clogged, his brain wasn't getting enough co2 and he passed out on the freeway, went off the road into a culvert and totaled out his other car.

If his brain runs on CO2 he has more problems than a lack of $5000.

Ha

 

[danno1]

Haha (haha!)this thread has "evolved" sorry to mention the carbon dioxide component....maybe my brain needs more OH! (O)!!!

 

[quietman]

Wow, you never know when you might learn something. I wondered about the brain and CO2 comments, and I found a study. When patients are put on increased oxygen, they can inadvertently get too little CO2. I always thought of CO2 as a waste product, but it looks like the brain actually uses it.

paradoxically, hyperoxic ventilation can make matters worse. Hyperoxia increases the exchange of air between the lungs and the atmosphere (hyperventilation), which reduces the CO2 level in the blood. This “hypocapnia,” i.e. low CO2, reduces the blood flow to the brain by narrowing the blood vessels. Hyperoxia also alters the heart rate and blood pressure and the blood levels of some hormones. It probably causes these changes by affecting the brain regions that control autonomic functions (body functions such as heart rate, insulin and other hormone release, sweating and gland action that are not controlled by conscious thought).

Conclusion of the study, if you are going to mess with the mix of gases breathed by patients, don't forget to include enough CO2 or their brain will suffer. Whether this could cause a car accident wasn't mentioned.

 

[danno1]

Quietman...as I stated: "this thread is EVOLVING"!
Thanks for all the wonderful input on my initial question. I remain your humble "creep-meister"!

 

[ERD50]

- Investor buys an existing policy that an older person no longer needs. Then they wait to collect.

Ahhh - I can see where this could actually "work" in some specific cases. Picture a 90 YO guy, in poor health with a big policy and no heirs. The death benefit is essentially worthless to this guy, so he can sign it over and maybe get more than the cash value. Same idea as the AIDS cases, but maybe more certain in the case of an oldster. Sad situations though, but even though people get "creeped out" over these, the intentions can actually be good. Like any free market transaction, both parties get something out of it, or they would not do it.

to the OP: What we are saying is this is very unlikely to work if you go out and buy a policy. It will be expensive. Very simply you will likely be better off just giving him $5,000 to help him, than you would by giving him $5,000 and buying a policy and expecting that policy to pay-off in excess of the premiums (let alone the original $5,000 "gift").

You seem to be looking for a way to help the guy (w/o hurting yourself too much), so that is noble, not creepy at all. But from a pure financial view, it is a misguided attempt. If you don't believe us, just get a cost on a policy and see.

-ERD50

 

[Maurice]

There at least used to be a thriving market in "stranger owned life insurance" before the credit bubble burst. Don't know if this stuff is going on still, but there used to be two flavors:

- Investor buys an existing policy that an older person no longer needs. Then they wait to collect.

- Investor hands money to an older person to go get a big LI policy. After 2 years, the elder signs over the policy to the investor for a cash payment and the investor waits to collect.

Generally speaking, this sort of investment only made sense if you had a few actuaries on staff who could try to outwit the insurers and if you had enough money to have a diversified pool of policies. One off is a fool's game, and the whole thing reeks of the charnel house to me.

It's still going on. Historically you didn't need to outwit the insurers, because they considered an existing policy holder a captive market and therefore would offer him just pennies on the dollar for a buyout of the policy.

Even some of the major investment banks play - we call it 'Life Finance' at my bank. This business has also evolved, there are now lots of derivatives that allow longevity risk and mortality risk to be actively traded in a variety of forms.

 

[quietman]

New York Times reports today that wizards on Wall Street are planning to do just this. Buy up life insurance policies of sick or old policyholders, package and "securitize" them like they used to do with mortgages, and sell the resulting bonds. Deja vu all over again.

http://www.nytimes.com/2009/09/06/business/06insurance.html?_r=1&hp

 

[Maurice]

Ever notice whenever you are close to a story the press always gets it wrong? It makes me question everything they report.


Anyway, that NYT piece could have been written by the insurance lobby. They don't like the banks stepping in on their territory. Notice even the article admitted that the policy holder who wants to cash out gets a much better deal from the banks than they do from the carrier.

Its also worth mentioning that these banks will bid on any policy of sufficient size. They do not try to find sick or dying people.

 

[M Paquette]

New York Times reports today that wizards on Wall Street are planning to do just this. Buy up life insurance policies of sick or old policyholders, package and "securitize" them like they used to do with mortgages, and sell the resulting bonds. Deja vu all over again.

http://www.nytimes.com/2009/09/06/business/06insurance.html?_r=1&hp

Oh yay! Collateralized Death Obligations. Nothing could possibly go wrong here.

I just have to wonder about unintended consequences. With the CDO market, we accidentally opened up a way to game the debt 'insurance' against a company's financial health, in particular the capital requirements backed by stock valuation. Drive a stock down hard enough, and a company would fall out of compliance with capitalization requirements for debt/bonds it had issued, and the CDO 'insurance' would pay out. (AIG and the mark-to-Lehman market, for example)

With the securitized insurance policies, the investment bankers would be betting on a 'timely death' on the part of the sick and elderly whose policies they have bought. Unlike a viatical settlement, where one buys interest in the life insurance of an elderly or terminally ill person, the securitized instruments represent hundereds or thousands of policies.

Some event such as a cure for a disease could throw off their computed returns. This happened in the 1980s with viatical settlements for AIDS patients, when new medical treatments raised the life expectancy from 2 years to over 10 years.

How would Goldman-Sachs or Credit Suisse react to a threat to their computed returns, such as a cure for leukemia or an effective anti-agathic drug? Would they, in a manner similar to the short stock/long CDO play popular about a year ago, provide an incentive to work against cures or life extending treatments for illnesses represented in the securitized portfolio?

 

[Maurice]

M.P. - you are ignoring the fact that single entities (be they insurance companies, pension funds, or government entities) already carry that very longevity risk you warn about.

It seems to me we should welcome a facility that allows the risk to be spread out to a larger pool of investors.

 

[brewer12345]

I am not particularly wild about stranger-owned life insurance for a number of reasons. However, the policies are ultimately the property of the insureds, so I suppose they are entitled to do with them as they wish.

As for getting nutzoid over securitizations of this stuff or re-remics, put away the tinfoil helmet. The securitizations are no different than what insurers and reinsurers have been doing for hundreds of years and re-remics have been around since the 80s.

 

[usat522]

- Investor hands money to an older person to go get a big LI policy. After 2 years, the elder signs over the policy to the investor for a cash payment and the investor waits to collect.

"After 2 yrs, ... signs (it) over"??
Sounds sort of like the straw man schemes that burned so many mortgage lenders. Of course it burned the schemers when they were caught, and are now serving time for fraud.
There are three parties to a LI contract- the owner, the insured, and the beneficiary. The owner decides the bene and can change it as often as he pleases. What investor, as beneficiary, would risk not being the owner?
It's all moot anyway if there's no insurable interest.

 

[brewer12345]

"After 2 yrs, ... signs (it) over"??
Sounds sort of like the straw man schemes that burned so many mortgage lenders. Of course it burned the schemers when they were caught, and are now serving time for fraud.
There are three parties to a LI contract- the owner, the insured, and the beneficiary. The owner decides the bene and can change it as often as he pleases. What investor, as beneficiary, would risk not being the owner?
It's all moot anyway if there's no insurable interest.

May not be an insurable interest as you and I see it, but this stuff happens all the time.