You bet your life insurance

0:00This message comes from NPR sponsor Charles Schwab. Financial decisions can be tricky. Your biases can lead you astray. Financial Decoder, an original podcast from Charles Schwab, can help. Download the latest episode and subscribe at schwab.com slash financial decoder. This is Planet Money from NPR. For a lot of people, the very mention of the word insurance can evoke a mixture of both terror and boredom. It's something lots of us might buy when we have to and then hope to never have to think about again. But that is not how Frank Sirowski thinks about it. Frank learned about the wonders of insurance early on.

0:42My first foray into insurance as a concept was when I was in fourth grade and I accidentally burned down my bedroom. What? I had a little candle that was in a plastic container, and I woke up to the wall on fire, smoke everywhere, and I was like, oh, what do I do? Frank runs down the hall to the bathroom to grab the first vessel he can find, which turns out to be a tiny toy bucket. So I'm filling this bucket, and I'm running back and forth to my bedroom, but the smoke detector goes off. Now the whole family's awake. What's going on? Frank's parents help him put the fire out. And when the literal smoke clears, Frank can tell it's done a lot of damage.

1:27It seems like he might be in big trouble. Except that is not how things go. Because of what his dad does next. What I saw my dad do was like magic. Frank's dad's magic trick was that he filed a claim with his insurance company. I didn't get in trouble for burning down my room. Because insurance was going to pay for it all. And so he got insurance to repaint the entire house. He got new carpet in all the bedrooms. He turned our crappy Macintosh into a gateway computer, which that was like a Cadillac. And so that's when I was like, ah, insurance. This is genius. So by the time Frank had his own first kid in his late 20s and a friend suggested it might be time to get his first life insurance policy, he was immediately open to the idea.

2:12He understood the basic economics of life insurance, the idea that these companies collect payments from a big pool of people, and only some die younger than expected and get big payouts. So the company uses the people who live a long time to pay for the people who live a short time. And Frank's a numbers guy. So he started thinking about the question of life insurance like a math problem. And when he looked at the difference between how much he'd pay every year over the 30-year term of the policy versus how much his family would get if he died, it actually seemed like kind of a steal. So I'm going to pay$608 a year, And if something happens to me, a car wreck, anything, they're going to pay a million?

2:53I'm just like, I feel like they're idiots. Right? Frank signed on the dotted line. And after he had a couple more kids, he decided to do it again, to take out another policy. Together, they were worth$1.5 million. And not long after that, something happened that would cement Frank's belief that life insurance was kind of the deal of a lifetime. He had a pretty bad cancer scare, got diagnosed with a rare kind of stage 4 lung cancer. Luckily, Frank was able to get on a new drug that put his cancer into remission. But the whole thing made him grateful he'd signed up for those policies when he was young and healthy.

3:29And then one day, just over a year ago, Frank stumbled across a deal that added a new and enticing and potentially lucrative twist to what he knew life insurance could do. It was a Facebook post talking about this weird thing called a life settlement. What is this life settlement? Like, haven't heard of that? That's new? Frank fires up the Google machine and learns that a life settlement is apparently a deal where you don't have to actually die to get some of your life insurance money. Basically, you sell your life insurance to somebody else. They give you a chunk of its value, like could be as low as 10 cents on the dollar or as much as 70.

4:05Then they take over paying the premiums, and when you die, they get the full payout. Frank discovers there's actually this whole ecosystem of companies clamoring to buy up insurance policies. And some seem like they want to buy his. Yeah, it's an asset I didn't know I had. Which was like, whoa, mind-blowing. And now Frank, being Frank, had a new set of calculations to make. Should he collect some of his money now while he's alive? Or wait to get all of it when he's dead? Hello and welcome to Play the Money. I'm Alexi Horowitz-Gazi. And I'm Vito Emanuel. The world of finance is filled with strange niche ecosystems and obscure techniques for moving money through time and space.

4:48But this secondary market for life insurance was arguably the strangest that Frank and the two of us had ever heard about. Today on the show, how the wheels of finance transformed a desperate deal made during the AIDS crisis into a multi-billion dollar industry. And why some of the biggest firms on Wall Street are now waiting for thousands of strangers to die in order to reap their returns. And we'll follow Frank as he figures out whether to make the biggest bet of his entire life.

5:22Support for this podcast and the following message come from Vanguard. Every day, shareholders meet to discuss important matters about the companies you invest in. Now you can make your voice heard too. Vanguard Investor Choice makes it easy to set your proxy voting preference for your eligible Vanguard index funds. Visit Vanguard.com slash InvestorChoice to learn more. Vanguard investors own shares of their index funds, and those funds own shares of the companies they invest in. Vanguard Marketing Corporation Distributor. This message comes from Ethos. It's easy to put off getting life insurance until something unexpected happens.

5:59That makes you realize your family needs you covered. Ethos makes it easy. It's 100 % online. No medical exam, just a few health questions. Apply in minutes and get same-day coverage up to 3 million. Get your free quote today at ethos.com slash money. That's ethos.com slash money. Application times and rates may vary. The market that Frank Zyrowski stumbled into last year, this big, complicated secondary market for life insurance, it started out as a very simple deal made in a desperate situation. And then it started to mutate and mutate again, following the pull of profit down a familiar path.

6:39You see, there's this theory of financial evolution that goes something like this. Somebody comes up with a financial tool to serve a real flesh-and-blood human need while turning a tidy profit. Like, need to buy a house? Might we interest you in something called a mortgage? Whole industries then develop around these specific human needs as people realize it's a good way to make a buck, directing huge flows of capital to where there once was none. But then someone else will recognize a new way to make an even bigger buck by tweaking that technology. By, say, deploying it in a new market or repackaging it.

7:14Yeah, like how about we bundle a whole bunch of mortgages and sell them off in tiny little slivers? Yeah, it doesn't always end well, but each time the original idea is adapted by somebody seeking some new pocket of profit, it evolves further toward abstraction and complexity. By the time Frank started thinking about whether to wager$1.5 million of life insurance, the life settlement industry had already become a place where policyholders like him were line items in massive investment portfolios. Nearly 40 years before all that, there was one flesh-and-blood human need that started it all. That story begins in the 1980s with a guy named Scott Page.

7:53Scott told us that he himself never set out to help create an industry where the profits flow from somebody's death. Yeah, that was a necessary evil. What was driving us was the fact that we were helping people. The first part of the tale, Scott explains, is actually a love story. Scott was raised in a conservative family in Baltimore, and by his 20s, he was struggling with his sexuality, wrestling with his desire to be with men. So one day you went out to see a guidance counselor about it. And the counselor's like, I know exactly how to quash those desires. You should join the military. So that very week, Scott enlisted in the Air Force.

8:30And then they stuck me in a room with, you know, 25 boys and said, take a shower and you've got four minutes. And I was like, well, I'm not sure this was necessarily the best thing I could do to not make me have homosexual thoughts. What Scott really wanted was to find somebody he could share his whole life with. And I would have these dreams of like having a husband that when we go to bed at night, we'll be laying in bed reading a book. and my husband will take his glasses off and close his book and tell me I love you and kiss me and we go to bed. By the time he got out of the Air Force, Scott says he was determined to try to make those dreams a reality.

9:08So one night he set out to Rehoboth Beach, Delaware to visit a gay bar called The Renegade. And as soon as I walked up to the bar, someone beside me said, hello, my name's Greg. And he was this masculine man with this dark hair and these big ears and big thick forearms and a big hand. And I remember when he shook my hand, I was just like, oh, my God, this is like everything that I've dreamed about is standing right here in front of me and just said hello to me. And that was the first night that I had ever slept being held by a man. Scott and Greg quickly fell into a long-distance relationship.

9:47And soon they started making plans for Scott to move to Cleveland for them to be together. But one night a few weeks before the move, he got a call from a man he'd never met. Who told me, I know you're dating Greg, and I know you're getting ready to move to Cleveland, but there's something you need to know, and he has AIDS. This was the late 1980s, and people were dying every day from this little-understood disease that was disproportionately afflicting gay men. Scott wasn't too worried about himself. They had been careful. Just why hadn't Greg told him? When they talked, Greg tried to explain.

10:20I didn't tell you I have AIDS because I was afraid if I did, I would have never had the chance for you to get to know me. Greg asked Scott if he could come to Baltimore to talk in person. And I remember he pulled up and I was sitting on the porch and I rode home with my family and I got in the truck with him and we rode around and he cried and I cried. And I remember saying to him, I'm in love with you. And he goes, but you know I'm going to die. He goes, you know I'm going to die. And I said, but you're not dead yet. And if you drove here and told me that you had a brain tumor, that wouldn't stop me from loving you either.

11:00I know what this disease is. I know what I'm in for. And I don't want to miss the opportunity to be with the love of my life because of fear. Scott moved into Greg's barely furnished apartment in Cleveland. They didn't have much money. They're regularly eating dinners off a cardboard box with a candle on it. But I didn't care. I was in love, and it was one of the happiest times of my life. But only a few months into the move, Greg's condition started to deteriorate. He grew weaker and weaker and soon wasn't able to keep up his work as a contractor. Scott wasn't making enough for the two of them, so their financial situation started to look dire.

11:38Scott remembers this ritual where they'd sort through the mail to figure out which bills they had to pay and which they could ignore. And one day, Scott remembers seeing an envelope in the stack he'd never seen before, sent by a company called John Hancock. And it was addressed to Greg, and he said, oh, this is my life insurance, and it's$3 ,000, and we can't pay that. Now, Scott didn't know much about life insurance at this point, but he did know that at its most basic, you pay premiums while you're alive, And when you die, a bunch of money goes to whoever you told your insurance company to give it to, your beneficiary.

12:11In this case, the payout, or the death benefit as it's called, would be$100 ,000. And I remember that moment thinking, wait a minute. I'm starting to see the signs of you dying. I got to figure out how to pay this premium. Scott started by calling the insurance company and asking them if there might be any way to delay or defer Greg's payments. He's really sick and he's not working. Is there anything that you can do? And the insurance company was like, no. They told him if you don't pay the premium by the due date, the coverage terminates. And as Scott learned more about how insurance worked, he came to understand that this strictness was actually baked into the business model.

12:52Yeah, the whole way life insurance companies price their premiums is based on the assumption that many of their customers will either lapse on their payments or drop their policies before they die, leading to no payout. But if Scott and Greg were able to keep Greg's insurance policy in effect, Scott thought that money might be really useful down the road. That would be transformative for me. You'd be able to have something to figure out what I'm doing the rest of my life. Greg also wanted Scott to be able to live a full life after taking on the emotional and financial strain of being his caretaker for the last few years.

13:27So he planned to make Scott the beneficiary. But that still didn't solve the problem of paying the premium. He says the first glimmer of hope came after they told the story of their dilemma at one of Greg's HIV support groups. Afterward, a stranger approached them. He was a very wealthy individual who had also been struggling with his sexuality and had lost people recently in his life who died of AIDS. And he was like, hey, I want to help. What can I do? So Scott and this benefactor work out a very loose kind of deal. The benefactor agrees to front them the money so Scott and Greg can pay the life insurance premiums and their living expenses if Scott agrees to repay him after Greg dies using the payout from his policy.

14:12Scott didn't realize it then, but this type of simple deal, a kind man loaning money to a desperate couple with life insurance as their way to pay him back, would eventually evolve into a multi-billion dollar industry. He wrote a check and signed it, and I ran and put it in mail and kept calling the insurance carrier, and I think they credited it like a day before the policy lapsed. In the months that followed, Scott returned to what he calls their angel investor to borrow money for Greg and his living expenses. The investor gave them the money in$10 ,000 installments as they needed it, eventually adding up to$40 ,000.

14:47And Scott says those payments transformed their lives in ways big and small. I remember struggling when Greg was in hospice and they ordered oxygen and the oxygen company came and wouldn't leave oxygen until I gave him a check. And if I wouldn't have had the money, I wouldn't have been able to write him a check to give him the oxygen that he needed to help keep him alive. Within a few months, Greg and Scott had told other people in their aid support groups about what Scott was able to pull off. And some of them started asking if they could get a similar deal. And at first, Greg and Scott's benefactor loaned to as many as he could.

15:20eventually with the addition of interest. But Scott says the benefactor soon ran out of money. So Scott started playing the role of a kind of broker, looking for other investors. He tried some actual banks, but says he was met mostly with hostility. You're taking advantage of these people and that life insurance policy is for their family. Scott says this was one of the first times he experienced this kind of outright distaste for what he was trying to do. The idea that anyone might profit from the deaths of desperate people. But Scott soon found all sorts of other people who were drawn to this business idea, specifically because of the handsome returns that it promised.

15:58And in order to attract them to the deal, he stopped framing it as a loan and instead pitched it as a sale. The idea was the investors would pay the remaining premiums for somebody dying of AIDS, plus a big lump sum to buy the whole policy. That was a key change. The investors themselves would now own the policy and become the beneficiaries. So when that person dies, they'd get paid directly. Scott, for his trouble, would get a 3 % commission on however much the policy sold for. But before he could really sell this thing, investors wanted to understand what kind of return they were going to get.

16:34And that meant knowing as accurately as possible when any given policyholder would actually die. Because the longer one of Scott's clients were to live, the more premiums the investors would have to pay. And the longer they'd have to wait for their potential profits. And the question the investors kept coming back with was, well, you're not a doctor, so how do you know how long he's going to live? And I thought, well, I'm not a doctor, but I could probably find one. Scott finds a doctor in Cleveland who's willing to look at the medical records of Scott's clients and offer his professional opinion on how long he expects each of them might live.

17:10That way, his investors could know when their investments might mature. Now, if all of this sounds a bit macabre and you're wondering, how in the world this is legal, Scott had to figure that out too. He went as far as becoming a licensed insurance agent in order to answer questions like, can a stranger buy your life insurance policy? And he learned there's actually a core legal requirement in life insurance called insurable interest, which you'd think would make that impossible. This principle came about in England in the 18th century after life insurance policies became super popular and people started running around essentially betting on each other's lives.

17:46The British government, who called this a, quote, mischievous kind of gaming, passed legislation that said people could only take out policies on someone whose death would hurt them financially. And that principle hopped the pond to the U.S. But in the U.S., there was one important change that made what Scott was doing legal. Back in 1911, the U.S. Supreme Court decided that as long as you took out the policy on yourself, a family member, or someone whose death would hurt you financially, you could then sell it to anyone you want. As Scott was building his business, this evolving financial instrument he was using got its own Latin name, biatical settlements.

18:25It roughly means money for a long journey. But at the same time Scott's new business was taking shape, Greg's health was declining. And by January of 1993, it was clear he was nearing the end. We had hospice, and he had a morphine pump. And he kept always wanting me to figure out how to push the morphine pump button. And he would just look at me and say, help me. Please, put me to sleep. Just put me out of this. I can't suffer any longer. I can't do this any longer. And I remember just pushing that button and pushing the button and pushing the button until he took his last breath. A couple months after Greg's death, Scott received a check in the mail for the full$100 ,000 life insurance policy.

19:05He paid back the anonymous angel investor that$40 ,000 plus the premiums. And with the money left over, Scott decided he actually wanted to build on this life insurance operation that had made his and Greg's life together so much better before Greg died. He knew there were thousands of other men like Greg in desperate need of money right now. And he now knew there was a way to make it profitable and scalable. He and his business partner started taking out ads in gay publications around the country. And their business started ticking upward. In the early 90s, Scott and one of his clients made it onto the massively popular Phil Donahue show, which introduced this whole concept to viewers nationwide.

19:44We got hundreds of letters from people who saw the show who said, Can you please help me? I have AIDS. I have a life insurance policy. Please, here's my phone number. Here's my address. Please help me. Biatical settlements were going national. Within a few months, Scott says he got wind that a new generation of competitors had started to spring up. Many were totally legitimate, but others were a bit more opportunistic. All of a sudden, you would get these sort of copycat piranhas coming around and smelling blood in the water and trying to jump into this business real fast to either deceive the investor or try to rip off the consumer.

20:18Some investors and people dying because of AIDS were scammed. Scott says all this helped fuel a regulatory reckoning, as states around the country were trying to figure out how to make sure viatical settlements didn't turn into a predatory Wild West. Regulators were coming up with a patchwork of new rules around how people could buy, sell, and broker the policies of people with a terminal illness. Scott says by the late 90s, he had been able to legally broker more than 3 ,000 viatical settlements for people dying of AIDS. But it was around that time that a new revolutionary generation of drugs came to market that meant people with HIV could now live for decades.

20:56Scott says that was obviously a miracle. But for investors, these viatical settlements no longer made financial sense. He and his partner thought their business might be over. Until they got a call from somebody with a different terminal illness. Cancer. And then we shifted. We were like, wait a minute. There's a cancer market. We can pivot. it. We're in this little bubble, this little gay HIV AIDS bubble. Let's go mainstream. But it was yet another evolution in this financial maneuver Scott had pioneered that would turn it into something he never quite intended. In the early 2000s, a new crop of big companies realized they could take the same contractual logic that had unlocked so much money with viatical settlements and apply it to a much bigger and much more lucrative demographic.

21:45Old rich people. These companies started brokering life insurance sales for people who weren't terminally ill. People who had policies with big payouts, but who might want to cash out early for purely financial reasons. Premiums can get really expensive, tens or even hundreds of thousands of dollars a year, depending on how big the policy is. These deals got a shiny new name, Life Settlements, no Latin this time. And this new financial product opened up a new Wild West that would again have to be regulated state by state. This new market was led by a company called Coventry, and it took off fast.

22:19Well, Coventry hit the scene as the beast. I mean, they were the 900-pound gorilla. So now Scott's business is getting overshadowed by these massive companies, employing fast-talking salespeople like a guy at Coventry named Jonah Kahn. Jonah remembers it was tough going in the early days. First off, life insurance companies were not happy because these deals meant they'd have to pay more death benefits. So one time when Jonah went to this big industry conference... It felt to me like our booth was in the back corner of the conference and they unscrewed the light bulbs above us and no one could find us, you know?

22:52And so you're walking around, I'm like, what did I get myself into? Is this really that bad? You know, I know we're doing good things. I know this is, like, helpful to people. Jonah was telling financial advisors about these life settlements, basically saying every time one of your clients decides to stop paying for life insurance because it's too expensive or their family doesn't need it anymore, the life insurance company gets to hold on to the money they would have paid out. But with a life settlement, your client can get some of that money now and let the investors walk away with the rest.

23:21As Jonah went around giving his roadshow spiel, he also remembers people making what he calls the Tony Soprano objection. Like this one time when he was giving a talk in Wisconsin. Someone raised their hand in the back of the room and said something to the effect of, like, you know, isn't someone just going to kill my client? And this is the height of the Sopranos. So everyone's thinking like the mob is out there like buying these policies up. And the number of Sopranos questions we would get was sort of off the charts. And Jonah's like, no, no, no, no, no, no, don't worry. Coventry's business model is based on buying up a bunch of life insurance policies to hedge against the risk of making any one bad bet.

23:56And so the sheer number of policies they buy obliterates any incentive to try to, I don't know, murder any one individual policyholder to get their return marginally sooner. By the early 2010s, Jonah says Wall Street had developed this massive new appetite for life settlements. After the fallout from the 2008 financial crisis, people were looking for investments that weren't tethered to things like the stock market or the bond market. And life settlements looked like a good place to park their money. As long as the people in their portfolio died on schedule, they would collect the payouts. And those portfolios could be sold and resold in bundles up and down Wall Street.

24:32Now the problem for companies like Coventry was finding enough people who actually wanted to sell their policies. So instead of just hitting up financial advisors... Do you have a life insurance policy you no longer need or can't afford? They started beaming their pitch directly into people's living rooms. Not just rich people, but also regular old retirees who might want a sort of advance from the afterlife to fund their golden years. We planned well for retirement, but I wish we had more cash. Now you can sell your policy for an immediate payment. We sold our life insurance policy and received$130 ,000.