Wall Street has found a new way to bundle assets into trade-able securities. They did them with mortgages and now they are doing them with life insurance policies. It’s going to be the next big thing on Wall Street. No doubt it will make many rich.
So here’s how it works. It’s very similar to how individual mortgages were bundled together to create an asset that people could buy, sell, trade and invest in. A banker buys up a $1 million life insurance policy from an individual policyholder for say $400,000.
It’s great for the policyholder, especially if they don’t need that protection anymore, because they get some of the cash value before they die. Then the banker will continue to own and pay premiums on that policy until the original policyholder dies.
Then when the original owner dies, whoever is the current owner of the policy, i.e. the bank, will be able to cash out the remaining amount of $600,000 as a beneficiary. That’s not a bad return if the premiums are at $100/mo and the original policyholder lives for even 5 more years. For the bank, a $6,000 + $400,000 = $406,000 investment gave them a return of $600,000. Not bad.
But the banker doesn’t just hold each individual policy in a file. He instead bundles a lot of them together into one asset. Think of owning shares in a corporation. The corporation has many assets like machines, lines of business and personnel who produce returns for the corporation as a whole. In this case, each policy is an asset that produces a return.
This is good news for the insurance industry in the short term. And it’s good news for those wanting to sell life insurance. There are a lot of real estate agents and other sales professionals that got laid off during the recession. Insurance sales might be a great option for them.
Of course, learning how to sell insurance is really no different than learning how to sell other things, like real estate, software or other financial products.
Related posts: