Vol 11 No 3		March 2009

Katt & Company is a national fee-only life insurance advising firm. The June 2002 Forbes magazine, and a July 16, 2003 Wall Street Journal article, name Peter Katt as one of only four nationally recognized advisors. The Forbes article states that, "…advisers are well worth the money… These savants are working for no one but you…" For references please contact us.

Life Settlements and Acme Explosives

"Slick firms are harvesting senior citizens to lend their lives to provide an inventory of life insurance policies to be sold two years later as poorly performing investments to gullible buyers."

Last month I was contacted by a fellow from Texas. Let's call him Wile E. Coyote. During 2008 he had purchased life insurance insuring 10 strangers for $400,000 as recommended by his financial advisor (sic). Some months after buying the policies it occurred to Wile E. that he really didn't know much about how the great yields he was promised happened. For example, although he had the names of the insureds, he didn't know anything about their health. His advisor, as always, was no help, so he called the firm that sold the policies. They refused to give him any information and stopped returning his calls. Wile E., being a resourceful fellow, tracked down the phone numbers of the insureds and started calling them. As a take off on Bob Newhart routines from the '60s I can imagine the following phone call.

"Hello, Mr. Smith. My name is Wile E. Coyote. I just was wondering how you are feeling these days? Yes, I know you don't know me, but have you been to your doctor recently? Unusual call? Well yes I guess, but have you ever had a stroke? Mr. Smith, please don't hang up. Look, I'm really not the nosy type but you see I own an insurance policy on your life and am trying to figure what the investment yield is likely to be. Could I come over and see you some time? Mr. Smith really, that kind of language isn't called for. Hello, Mr. Smith?"

Based on Wile E.'s detective work he observed that many of his insureds were living in retirement homes. Here is my speculation. Slick firms are harvesting senior citizens to lend their lives to provide an inventory of life insurance policies to be sold two years later as poorly performing investments to gullible buyers. The Mr. Smiths are being compensated for participating as insureds and then giving the sales rights to these firms. They are also assured no will know who they are. The firms hook up with advisors to sell these policies using phony rates of return using life expectancies that are too short to entice investors. The firm makes lots of money from life insurance commissions and sale of the policies to the Wile E. Coyotes. I have repeatedly pointed out, unless insureds' have had a deterioration in health since the policy was purchased there will be no mortality arbitrage. With no mortality arbitrage there is no investment opportunity in the aggregate. The amounts being paid by investors like Wile E. are way too much and in the aggregate they will have failed investments. Many investors will not be willing to pay premiums and simply let policies terminate with no value. Somewhere along the way investors may decide to make investment mature more quickly. Be careful Mr. Smith. I'm afraid the slick have overwhelmed decent citizens. Damn them!