I think there are reasons to put a stop to this practice, but in fairness to this guy, what you’re describing here isn’t what happens. He gives dying people 10K and then gets a faster payout after they’re dead, and then that’s it–the bond is redeemed and everybody goes home.
If you picked a hundred people at random, this would work out semi-well for all concerned, but he picked people NOT at random, making it work out well for his terminally ill partners (a little bit of free money immediately), very well for his hedge fund (a ton of cheap money soon), and very poorly for the people selling the CDs (oh crap, nobody checked to see if they were all dying).
A faster payout of what, though, the 10K? Does he insure them for more and only giving them a portion? I’m still missing something here.
So, as I understand it, here’s the deal.
The Bank will take $1,000,000 from you and pay you back $1,100,000 in 20 years (for a mildly crappy interest rate) OR when you die. They price in the chance of a given 50-year-old dying so that they’ll still make money. If it weren’t for the “death put,” the interest rate would have to be higher to be competitive. (I’m assuming they at least ask the age, or they’d already be overrun with 99-year-old millionaires looking to pad their estates.)
Along comes Mr. Hedge Fund, who sees an opportunity to make that extra $100K right now, or at least pretty soon. He finds Mr. Terminal, who can’t afford the $1,000,000 up front, and says, “here, have $10,000 in exchange for your signature on this CD.” Then Mr. Hedge Fund puts up the actual $1,000,000.
Six months later Mr. Terminal dies, Mr. Hedge Fund collects $1,100,000, and has made a $90,000 profit in six months instead of $100,000 in 20 years. The end.
Ugh. I have to go wash my hands just after reading that.
It’s morbid, but then so is life insurance. The old joke is that when you take out life insurance, you’re saying “I bet I die tomorrow!” and the insurance company is saying “I bet you don’t!” And really, this is just another form of life insurance.
What’s newsworthy about it is that someone managed to successfully screw with the system to the detriment of the “insurer.” Although I can understand why regulators would want to avoid having these kinds of shenanigans played in the first place.
I think most life insurance is about making sure the family can pay for the funeral, though?
Life insurance at least pays out to the bereaved, allowing them to afford to pay for the funeral and get their shit together when things have just fallen apart.
This guy was too busy making money hand over fist to care about any of these deaths. Maybe the first one. Maaaybe. How would you feel if you dad dies and some investor makes 90K off of it?
Look, I have family in the funeral home business, I know people make money off death. However, the services they provide are much more about comforting the bereaved and organizing things so the bereaved can concentrate on what they need to, mourning, comforting each other, whatever they need, instead of worrying about flowers or transportation for Aunt Rose or who’s going to pay the monument installers. This hedge fundie isn’t doing any of that.
Well, I mean, in that situation the better question is how did my Dad feel about it? And the answer is, Dad voluntarily chose to get $10,000 for free that he could pass on (or pay for his burial, etc.). If Dad had had a problem with somebody else making $90,000 off his death–money that Dad never could have made himself–then Dad wouldn’t have done it.
(Full disclosure, my Dad is a retired accountant, and would probably love to get in on this shit if he develops the right kind of terminal illness. He’d literally brag about it for the rest of his life. But that’s just him.)
You’re right that the investor doesn’t care about the grieving families, but again, he’s truly not doing anything to cause or exacerbate their grief. They really are better off financially and no worse off spiritually. Maybe it’s a morally abhorrent practice–I totally get why even the thought of it is squicky–but if he’s being unkind or unethical, it’s not to the survivors of his partners.
Depends. As an actuarially young person, the term life insurance I carry is about making sure that my wife can keep making the mortgage payments if she’s suddenly deprived of my salary. 30 years from now, when we’re hopefully retired and living off sufficient savings, then yes, it’ll really be more just about absorbing the temporary expenses, if we bother having it at all.
I’ll just say that it’s not my cup of tea.
But it would normally only be purchased for those who have loved ones they want to leave money to. Buying it to make a quick $10K now, since it doesn’t cost YOU anything, means you can be convinced to do it by a total stranger. In the long run, this means the insurance companies are going to have to clearly specify who/what can be named as a beneficiary, or else they’ll stop offering the option (pun intended) to anyone.
But the loved ones don’t get anything from this setup, except for maybe what’s left of the $10K if-and-only-if it’s not already spent by the time the insured person dies. $100K pays for more than a funeral.
If the person taking out the policy doesn’t have anyone to leave money to, then only the insurance companies are getting manipulated, but if that person does, then they’ve been talked into taking pennies on the dollar now (when it’s almost certainly going to be gone quickly due to medical costs) and leaving their loved ones nothing. THAT is not cool.
If I’m reading the situation right, these are bonds with such a high price that your average dying person couldn’t afford them. (The only actual number I have is the $10K, but for this to be worth the hedge fund’s time and effort, the payout must be much more, which means that the price of the bond must be much more than that.)
If that’s right, then the loved ones do get the $10K (or the not-yet-deceased does, anyway), and it’s $10K more than they’d otherwise have. Even if Mr. Hedge Fund were interposing himself between the bank and a family that COULD afford to personally scam the bank, he’d arguably be doing them a service by using his own liquidity and taking on the risk, however small, that the terminal partner would get better and not die promptly. But I’m pretty sure the people he’s talking to couldn’t afford it.
What I think is so fascinating about this is that our default assumption in these situations is SO strongly that the little guy gets screwed, and for good reason. But here it’s the very rare case of the little guy just being an accessory to one big guy screwing another. Again, I think there are probably very sound policy reasons to put the kibosh on this practice. But it really does look like the terminal partners took on zero risk and made an immediate nonzero profit. That’s enough to make you drop dead from shock.
But in the case of life insurance, at least the big monopolistic, politically connected industry has a stake in you NOT coming to a premature end…this little “financial innovation” puts that on its head. If that isn’t a perverse incentive, I’m not sure what is…
I admit I’d be troubled to find that this dude was pulling the plug on his new partners as soon as they signed.
Although that should definitely go in the made-for-TV-movie of this story, whether or not it’s true.
Why not just legalize tontines?
And what does it do to the premiums for people who genuinely want this insurance?
It’s so easy for the wealthy to act as parasites today.
We need a legal or tax framework that discourages leeches, or a system to punish people for all this non-productive profiteering.
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