Transferable Insurance Policies investment

[mmedved@gmail.com]

There are articles floating around describing how those work and
talking about 16% average annual return. Are those scams or real?

Example:
http://www.marconews.com/news/2006/nov/13/tax_secrets_wealthy_making_1636_annual_return_with/

Comments?

[wyu@talisys.com]

I wouldn't say a scam but more of an issue of not issuing the
disclaimer that past performance is not a predictor of future
performance. High past returns are due mostly to inefficient markets.
With fewer dollars chasing a large universe of policies, you can offer
lowball prices on the best policies. Since people don't have many
choices, just getting more money than their surrender value is a great
deal. If more players start to go into this market, that'll drive the
purchase prices up and reduce returns to the appropriate risk-return
ratio.

There are certainly risks. Where as a company writing a life insurance
policy faces the risk of people dying too soon and having to pay out
benefits before enough premiums are paid, TIP-investments face the risk
of people living too long in two different ways.

1) Return over time/opportunity cost. Let's run very simple numbers.
Let's say you pay somebody $50K for their $100K policy ($50K return).
The insured dies in 1 year -- easy calculation, 100% total, 100%
annualized. He dies after 10 years -- 100% over 10 years is 7.2%
annualized. If he lives 20 years, that's down to 3.5% annualized.

2) Cost of insurance increases. There is the possibility that the cash
value used to pay for the CoL becomes exhausted. In this case, the
investors either have to put more money in to keep the policy in force
or let it lapse and write off their previous investments. If you look
at published schedules, you see the CoL increases geometrically to a
point where at 100 years old, it costs $499K a year in premiums to keep
a $500K policy in force. If the underlying investments holding the cash
values don't keep up, all you can do is let the policy lapse and get a
-100% return.

As a cautionary tale, there was a nice niche in the mid-80s for
companies buying life insurance policies from people with HIV. Then the
protease-inhibitor triple-drug cocktails were developed and people
taking these drugs suddenly had their lifespans increased from ~2 years
to 10+. These companies lost their shirts when that happened.
Basically, TIP-investments are very susceptible to advances in
biotechnology.


wrote:
> There are articles floating around describing how those work and
> talking about 16% average annual return. Are those scams or real?
>
> Example:
> http://www.marconews.com/news/2006/nov/13/tax_secrets_wealthy_making_1636_annual_return_with/
>
> Comments?