James Vlahos reported on a fascinating financial instrument:

• It is possible to sell your life insurance policy so that when you die, instead of your family, the person you sold it to benefits.
• The buyer of the policy agrees to pay your premiums and gives you instant cash. In return they hope you die soon so that they don’t have to pay too many premiums, and can pocket the difference between what they paid for your life insurance policy, and the benefit that they get.
• Such an arrangement is extremely useful for those that have been in a debilitating accident and know that they will die soon. They can enjoy the finer things in life by selling their policy now for a substantial amount of cash.
• In one such transaction a buyer paid a seller $305,000 for a policy that would award the buyer $500,000 when the seller died. Thousands of pages of medical records verified by independent experts showed that the seller was likely to die in two years, making it a fairly good investment.
• The practice rose in popularity during the AIDS epidemic.
• Some investors like the safety of such an instrument. No matter how well or badly the market does, the value of a life insurance policy remains the same.
• Some people end up living a lot longer than expected. To mitigate the risk it is important to diversify and buy a large number of life insurance policies. Statistically speaking, you should come out on top eventually.

The entire article is fascinating and opens up an intriguing new world. Click here and find out how the life insurance industry feels about the practice, why this is a pro-consumer innovation, the incentive to murder, the historical roots of the practice, its rise during AIDS, the total value of the market, the information problem, the key metrics for such investors, and just so many more intriguing details.

Source: The New York Times

Via: Marginal Revolution