Insurable Interest – What Am I Missing????

A long time ago – about four decades ago –  in a world different from our current world, I became a life actuarial student. I first was employed as a Summer Actuarial Student at John Hancock and after graduation, Hancock invited me to come back as a full-time employee. My first assignment was in  Hancock’s Actuarial Research department. Without getting too far off-track, I only passed two tests but through the dim reaches of time thought that they taught me you should only sell life insurance products to people who had an insurable interest.

And that made perfect sense to me. I didn’t need to pass more than even one actuarial test to understand that made perfect sense. Why on earth would anybody want to purchase a life insurance policy if they did not have an insurable interest?

Fast forward with blinding speed to current times and life settlements. Why would any policyholder owning a life insurance policy want to sell that policy to someone who had no insurable interest in them? Isn’t that basically asking the fox to guard the hen-house? Isn’t that asking for “an accident” to happen to them? Whether insurers or banks or others profitably securitize life settlement contracts or agents make decent commissions from life settlements is nowhere near the issue.

It seems to me to go against all reason. As a policyholder, selling your life insurance policy creates a moral hazard or in this case, a mortality hazard.

I think this practice should be outlawed. Immediately.

Tell me why I’m wrong!

Published in: on September 30, 2009 at 4:21 pm  Comments (2)  
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2 CommentsLeave a comment

  1. You are right about the moral hazard part. It would be in the interest of a viatical settlement company to have you die sooner rather then later so that their ROI goes up. However, they’re not stupid enough to kill people off. They’re making too much money, and the business wouldn’t last long if they got wind of that. Not to mention the risk involved (aside from the moral issue) in murdering someone from law enforcement.

    On the other end, they are providing a service that is valuable for the insured. If you need money now and not a payout to beneficiaries later because your circumstances changed, why wouldn’t you sell it? Insurance companies paint it as evil because it hurts their profitability. When a settlement firm takes over paying the premium there’s no chance that it will grow poor or old and senile and stop paying premiums before death of the insured. That’s factored to the cost of insurance and messes up their pricing.

    As a financial consultant I have to weigh all the options and advise what’s best for clients. I could see cases occurring in which a settlement makes sense.

  2. Could a school or university have an insurable interest in their students? Just as a student? What if the student owed the school money? Or if the student was also in an employee relationship with the school?

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