Tuesday, September 8, 2009

The Debts of the Spenders: Structured Finance Comes to Life Insurance

The plan is simple: buy life insurance policies from seniors who need cash upfront (typically life insurance pays out on the policy holder's death but many states allow for early redemptions) and then re-package these settlements into bonds for the general public to buy.

This is a brilliant scheme that capitalizes (no pun intended) on generational demographics. The Baby Boomer wave currently set to retire is facing a longer life span due to advanced medical technology and better living conditions. But at the same time, boomers are also confronted with a higher cost of living - most notably in health care expenditures (seniors are the number one consumers of health care) - and dwindling financial resources. Many boomers have decided to extend their stay in the workforce or search for jobs, presenting stiff challenges to younger entrants in the job market.

Meanwhile, Wall Street gets to charge lucrative fees for the underwriting, marketing, and management expenses associated with these structured finance deals. It's almost like a return to the old days of generous leverage and high flying living. Almost.


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