Bad investment of the day, life-insurance edition

By Felix Salmon
December 21, 2010
robo-doctor:

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You’ve heard of robo-signers. Now meet the robo-doctor:

Dr. Cassidy said Life Partners paid him a monthly retainer of $15,000, plus $500 for every policy bought by Life Partners clients. That translates to $270,000 annual pay for part-time work that has brought him more than $1.3 million since 2002, Life Partners confirmed.

Dr. Cassidy, who declined to be interviewed, testified that he reviewed case histories three days a week for Life Partners and it sent him 100 to 200 cases weekly. That translates to 33 to 66 per working day.

At life-expectancy firm Fasano Associates, doctors review an average of six a day, said Michael Fasano, president. “These are complex medical histories of older people,” he said. Mr. Pardo said Dr. Cassidy is under no time pressure.

Dr Cassidy’s job is to come up with life-expectancy numbers for his boss, Mr Pardo, who then uses them to sell life-insurance policies at enormous markups to third parties:

In late 2005, a policy on the life of an 80-year-old California woman was available for purchase. Life Partners acquired the $1 million policy on behalf of its clients, paying $300,000, according to company filings in Texas.

It brokered the policy to the clients the same day for more than $492,000 plus five years of future premiums, an additional $58,000.

This spread is lower than typical. Mr. Pardo agreed with Journal estimates that on average, Life Partners sells a policy for about 2.4 times what the owner is paid.

Life-insurance settlements are a genuine asset class, but you certainly don’t want to buy one from Life Partners. As ever, the more liquid the investment, the less likely you are to be ripped off. One good question to ask is how much you could sell your investment for tomorrow if you bought it today. But as far as I know, there’s no secondary market in these things which is remotely accessible to individual investors, which is a big warning sign. As is the fact that the asset class seems to be plagued by scams.

The big warning sign at Life Parners is that Cassidy’s life-expectancy estimates were so low — generally in the 2-4 year range. Which makes the business look more like viatical settlements, where you buy insurance on the terminally ill.

I also wonder whether Cassidy has any actuarial training; the WSJ says only that he’s “a cancer specialist in Reno”. Most people intuitively underestimate the life expectancy of the elderly. Which is one reason why selling life insurance tends to be a better business than buying it.

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