Earlier this year, a company called Life Partners declared bankruptcy. They had a pretty simple business model: they brought together investors and dying people in need of cash. The investors put up some money and paid the life insurance premiums, collecting the insurance payout when the person eventually dies. This business model doesn’t work out for the investor, though, when the insured person lives longer than anticipated.

While the invention of advanced anti-retroviral drug cocktails to control HIV has been a good thing for humanity overall, it was not a good thing for the life settlements business. That’s the business of buying out life insurance policies so a terminally ill person has some cash to live on: people also call them “death bonds.”

The business isn’t inherently evil, but it becomes evil when a company deliberately under-estimates how long a person can be expected to live for the purpose of calculating their cash payout and when selling potential investors on the idea. Life partners brought together people to own shares of a dying person’s policy, telling them what the anticipated payout would be and how long the person was expected to live. The problem? The patients didn’t die.

From a human point of view, that’s great news. From the point of view of an investor stuck paying the person’s life insurance premiums, that’s a disaster. Life Partners sold shares of life insurance policies to individual investors and to asset managers, but a federal jury found the company guilty by of deliberately under-estimating how long insured people would live.

Life Partners filed for bankruptcy after it was ordered to pay a judgement of $46 million by the Securities and Exchange Commission, but what complicates liquidating the company is that investments are tied up in the life insurance policies of people who still haven’t died.

Bloomberg uses the example of one woman who bought a share of a policy in 2001. She put up $25,000, and the man was expected to die within 18 months. When his life insurance paid out, she would receive $30,000. The man hasn’t yet died, and her share of his life insurance premiums in the interim has been $8,000. This turned out to be a poor investment.

Death Bond Investors Risk Total Loss in Life Partners Bankruptcy [Bloomberg]

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