Death-bet insurance involves a person taking out life insurance, and then turning around and selling the policy to a stranger – a hedge fund, for example, via intermediaries – who pays the premiums and collects after the insured’s death. Growing in popularity as a system of side-bets on the insurance markets, it has also been controversial particularly as it raises questions about whether it violates the rule of having an insurable interest. On the other hand, it puts a bundle of immediate cash into the old person’s hands. The overall investor problem is that if the insured person does not die on schedule, then the investor has the double-whammy of having to wait for payout and pay premiums in the meantime or lose the payout.
Insurance companies have been suing the third party investors, the investors have been countersuing the insurance companies, and in some cases, relatives of the deceased insured have been suing to claim that the insurance proceeds really belong to them. There have been several articles in the WSJ and elsewhere describing the contests that have arisen particularly as the business model has been under pressure on account of bad actuarial assumptions about how long the insureds would live. There is a good piece on the whole litigation mess in today’s WSJ:
The life-policy secondary market was one of many sent reeling by the global financial crisis of 2008-09, but it also has been hurt by revised actuarial tables, which show older people living longer, and the mounting litigation.
Apart from several hundred suits that have been filed by insurers, suits also have been filed by relatives of some of the deceased elderly, alleging that death benefits belong to the family members.
With much of the litigation in early stages, legal experts say it is unclear how