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AUGUST 13, 2007
Death Bonds: Ghoulish Gamble Or Welcome Option? While BusinessWeek should be congratulated for shining light on some of the allegedly nefarious practices of certain players in the life settlements industry ("Profiting from mortality," Cover Story, July 30), the fact remains that a properly executed life settlement can bring policy owners much more value than a simple cash surrender of the policy. With estimates of 2006 settlement volume in the $8 billion range, it is apparent that consumers appreciate having this option. Unscrupulous players can be found in any type of business. However, reputable life settlements brokers are able consistently to solicit offers from reputable institutional buyers, creating an auction-like setting and securing the highest price for the policy owner. Additionally, when bid-history reports are provided to the seller and all participating buyers, the transparency helps ensure that all parties fully understand the transaction. But is the practice "macabre"? Well, that is best left to the eye of the beholder. Insurance carriers, annuity issuers, long-term care underwriters, and even the Social Security system undeniably—and obviously—have a keen interest in the longevity of their participants. I. James Cavoli Chief Executive Officer Life Settlement Insights Cleveland When I was a stockbroker at Cantor Fitzgerald some 35 years ago, we aggressively offered a U.S. Treasury bond called amusingly a "flower bond" because of its unique feature. Purchased at a discount, it could be redeemed at par, regardless of market value, to pay estate taxes. Many a transaction was done at the deathbed of a Cantor client. Dick Israel Beverly Hills Matthew Goldstein makes it clear that the life settlements industry needs better regulation and more transparency. We agree. Consumers have a right to know exactly how much their life insurance is worth on the secondary market and how much their broker would make in commissions. These principles have been embraced by the major investment banks that formed the Institutional Life Markets Assn. Lost amid the focus on the bad actors and past abuses, however, is the reason for the secondary market's current boom: There are millions of seniors who would rather get paid for a policy they no longer want or need or is now unaffordable than simply let it lapse or surrender it for less than fair value to the original carrier. At present, about 8 out of 10 life-insurance policies are never paid out. A life settlement option puts money into the pockets of consumers to pay health-care bills or finance retirement and is a valuable option that must be preserved for consumers. Jack Kelly Director of Government Relations Institutional Life Markets Assn. Washington With death bonds, those who feed off the fees involved are sure winners. The remaining participants in this win-or-lose contest are the bondholders vs. the life insurer. Unless a life insurer's management is corrupt, I, as an actuary, would place my bets on the insurance company to win, as the bondholders hemorrhage slowly. Should a life insurer eventually fail from such a zany scheme, any bailout from a state guaranty association would, in the end, come from the public. Claud Y. Paquin Fayetteville, Ga. When Grown-Up Kids Live At Home I appreciated Christopher Farrell's article on "Sharing with Mom and Dad" (Personal Finance, July 30). His advice is right on. We only hope Mr. Farrell in another article will cover the other half of the trend—the 18 million adult kids now living at home with their baby boomer parents. There are both financial and psychological reasons why this other extended family living arrangement also often makes sense. Both reflect our changing American culture as we all adapt to smaller and thus closer families. John L. Graham Irvine, Calif.   Approving A Loan The Careless Way "Why Fannie (FNM ) and Freddie (FRE ) are fidgety" (News & Insights, July 30) talks about "low-documentation loans." It would be interesting to know how many "fake-documentation loans" have been made. About three years ago we subpoenaed the mortgage application that a plaintiff in a bogus lawsuit had submitted to a national lender. Attached to her application were copies of W-2 forms stolen from two different people whose annual earnings were much higher than the plaintiff's. The plaintiff had simply pasted her own name onto the copies. She did not even bother changing the Social Security numbers on the W-2 forms. Thus, the lender received an application with two W-2 forms, which, between them, contained three different Social Security numbers. They still approved the loan! David L. Hagan Pismo Beach, Calif. Short-Term Capital Market Bias: A Different View Lawrence Mitchell's tax cure for alleged short-term capital market bias is misguided. He confuses investor holding periods with market valuation horizon. The short-term holding period is irrelevant. The key is the long-term valuation horizon reflecting the years of expected cash flow needed to justify the current stock price. Managerial shortsightedness is based on misaligned compensation programs which focus on accounting-based earnings per share growth. The tax solution will distort capital allocation and negatively impact market performance. The real solution involves realigning compensation programs and not in new expert-based taxes. Joseph V. Rizzi Riverside, Ill.
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