Shortly after I first met my friend and colleague, Jon, he mentioned that his mother-in-law lived with them. Jon told me that she had been diagnosed with terminal cancer. “How long ago was this diagnosis made?” I asked. I’ll never forget his response:
Twenty years ago! She is tough as a lizard!
I was once again reminded of this conversation when I recently read an article about a company that buys life insurance policies from their owners and then sells them to investors. The company will eventually collect the death benefits and distribute the proceeds to the investors. The company assigns a life expectancy to each of those from whom they purchase the insurance policy. Therefore, the price the company pays for the policy is based on the nominal value of it and on the life expectancy of the seller. But what happens when those who are insured live longer than predicted by the company’s experts? In such cases, the investors will see their returns decline. I assume that most of the people who sell their policies are wealthy given the implications in the article that these life policies are in the seven figure and above category.
Why is it that I don’t bet on the rapid demise of wealthy strangers? Wealth and life expectancy are significantly correlated. Even among millionaires, those with multiple millions tend to live longer than those with just one million. My surveys and estate data from the IRS consistently show that rich people live longer than those in the general population. Also, I would have a difficult time applying mortality and actuarial estimates of life expectancy for the entire population of the U.S. to wealthy people. (And note Jon’s mother-in-law is wealthy.) In addition, even when experts such as physicians estimated the life expectancy of each of the individuals who sold policies, more often than not they underestimated longevity. In the article, it is pointed out that of the 1,197 policies analyzed 81.3% of the owners lived past life expectancy.
Why is it that the rich live longer? Genetics, possibly; that’s not my area of expertise. However I do know from my research that most millionaires are physically active, have a wide variety of interests, are part of a loving family, are not overweight, etc. In an earlier blog, I wrote . . . hypereating is a danger to one’s physical well being. . . most millionaires eat in moderation, they are well disciplined. . . it is rare to find any millionaires whom I interviewed . . . to be overweight. . . the typical male millionaire is 5’10” tall and weights 184 pounds. . . . In addition only 10% weigh 225 pounds or more, and most of these are 6’1″ or taller. Accordingly only 10% of women millionaires weigh 170 pounds or more, and most of these are 5’10” or taller. Typically, she is 5’5″ tall and weighs 138 pounds.
Self designated judgments by millionaires regarding their health are fairly accurate assessments of reality. Overall 79% of millionaires categorize their physical health throughout their adult lifetime to date as consistently excellent to generally excellent. This does vary by age. Eighty-eight percent of those 45 or younger as opposed to 69% of those who are 70 or older categorize their health this way.
Finally, I feel that there is something morally wrong with investing in the insurance policies of strangers. I prefer to read about the performance of my financial investments in the money sections of my newspapers and not in the obituaries.