New efforts are underway in Sacramento to regulate how investors buy and sell existing life insurance policies, a practice that critics contend allows speculators to make money by wagering on when a person will die.
Currently, an estimated $27 trillion worth of life insurance is in force, most of it to provide financial security for survivors. But in recent years, older Americans have increasingly been selling their policies for cash to investors who see an opportunity for profit as they take over the premium payments and then collect proceeds when people die.
Sales of these policies to investors and the packaging of them into larger investments have grown from a few billion dollars a decade ago to over $13 billion in 2006, according to a state report. They are expected to reach $150 billion by 2019.
Across the nation, this largely unregulated market has also caught the attention of state regulators and lawmakers who are calling for more consumer protections, better regulation of these purchases and an outright ban on the most controversial type of transaction, known as stranger-originated life insurance. In such deals, speculators basically pay healthy senior citizens for the right to take out insurance policies on their lives.
Skeptics suggest that investors buy the policies in hopes of an early death and a quick payoff. "It's basically speculating on human life," said Joseph Belth, a retired professor of insurance at Indiana University.
But leaders of the industry counter that buying unwanted life insurance policies is a boon for cash-strapped senior citizens, who often receive more money than they'd get by "surrendering" their policies or simply stopping premium payments.
"For the vast majority of these, the decision has proven extremely lucrative," said Doug Head, executive director of the Life Insurance Settlement Assn., a trade group. "For well over a decade, consumers have asserted their property rights" by selling their policies.
This is the second year that the California Legislature has approved a bill to regulate the sale of existing life insurance policies and ban stranger-originated policies. The bill is being lobbied heavily in the run-up to Sunday's deadline for the governor to sign or veto legislation.
Last year, Gov. Arnold Schwarzenegger vetoed a similar bill, complaining that it didn't provide sufficient disclosure to consumers. He asked all parties to send him another bill this year, but so far has not indicated how he'd treat the new proposal.
The latest measure, SB 98 by Sen. Ron Calderon (D-Montebello), is supported by some insurance companies and consumer groups and opposed by others. A national association of companies that buy and resell life insurance policies is pushing hard for a signature from Schwarzenegger, but its state counterpart wants a veto.
Calderon's proposal is partly based on model laws developed by groups representing state insurance commissioners and legislators that specialize in insurance issues.
These model laws ban purchases of stranger-originated policies while preserving and regulating people's long-established right to sell their existing life insurance policies to third parties.
The proposed legislation tries to rein in a burgeoning secondary market in life insurance policies that are bought and repackaged into securities. Banks, pension plans and individual investors buy the securities, betting they will earn at least double-digit returns by enticing seniors to sell their existing policies.
Congress and the Securities and Exchange Commission are looking into the growth of the so-called life-settlement market.
"We must examine whether or not securities products based on life settlements actually contribute to economic growth or merely prolong the casino culture on Wall Street that got us into our current economic mess," said Rep. Paul E. Kanjorski (D-Pa.) at a Sept. 24 congressional hearing of his capital markets subcommittee.
Some witnesses at the hearing warned that potentially risky investments in life settlements could collapse much like the bursting of the mortgage-backed securities bubble, whose bursting last year led to the worst U.S. recession in decades.
But designating a bright line between banning potentially fraudulent, stranger-originated life insurance scams and protecting the established property right of policyholders to sell their existing policies is a difficult task, Belth said.
"It's murky," he said, "but there ought to be some regulation."
Opponents of the California bill are a coalition of those that call the Calderon bill too stringent and those that say it's riddled with legal loopholes. A group of four big insurers, led by John Hancock Life Insurance Co. and Prudential Insurance Co., argues that the bill would make it harder for them to detect and stop potential stranger-originated schemes.
Calderon says his bill is pioneering because it would ban stranger-originated life insurance, defined as an "arrangement to initiate the issuance of a life insurance policy in this state for the benefit of a third-party investor."
But no amount of regulation can overcome the basic callousness of selling and reselling someone's life insurance policy in hopes of profiting from their death, said Belth, the author of a well-regarded consumer's handbook on life insurance.
"When they sell your policy, you are tracked for the rest of your life and you have to deal with people wanting to find out if you're dead yet," he said. "I find the whole thing to be distasteful to say the least."