Today’s WSJ has a very good article on the fast-growing secondary
market in life insurance policies, centering on the asset class’s undisputed
leader, Coventry. It mentions that this market is objected to by the life insurance
industry:
Life settlements also threaten the business model for life insurers. Each
year, about 6% of life-insurance policies lapse, according to the Insurance
Information Institute, a trade group, as people forget about them or decide
they don’t need them anymore. Coventry and its rivals raise the prospect that
fewer policies will be abandoned, leaving insurers to pay out more in death
benefits. Meanwhile, insurers already pay an often-small sum to policyholders
who cancel coverage, but they may have to find a way to pay more to compete
with life-settlement firms’ payouts. "That would drive the premiums through
the roof," says MetLife’s chief executive, Rob Henrikson.
Left unmentioned is the elephant in the room – something neither Coventry
nor the life insurers really wants to talk about – which is that life
insurance depends for its very existence on being one big tax dodge. All the
money invested by a life insurance company is exempt from taxation. As wikipedia
says, "for this reason, insurance policies can be a legal and legitimate
tax shelter wherein savings can increase without taxation until the owner withdraws
the money from the policy".
If life insurance policies become tradeable assets, however, rather than simply
protection for surviving family members, then the case for their tax-exempt
status weakens significantly. And losing that would truly devastate the life-insurance
industry.