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Our View: An unsettling view of how life insurance really works

Do you have life insurance? Are your premiums up to date? Those questions shouldn't be brushed aside after the revelation that many life insurance companies bank on the chance most policyholders will let their coverage lapse.

Do you have life insurance? Are your premiums up to date? Those questions shouldn't be brushed aside after the revelation that many life insurance companies bank on the chance most policyholders will let their coverage lapse.

As reported in a New York Times article printed in yesterday's News Tribune ("More seniors bank on insurance"), insurance companies saved $1.1 trillion -- that's with a "t" -- last year when 19.8 million policyholders stopped making premium payments. In comparison, the article said, citing the Insurance Information Institute, "the industry paid death benefits on only 2.2 million policies."

The numbers weren't suddenly being publicized because insurance companies wanted to warn consumers to make their payments. Rather, the article was about insurance companies' fears over seniors who sell their policies for cash to speculators looking to collect the benefits after they die. As an example, an 80-year-old New York financial consultant sold a $7 million policy on his life to investors for $2 million, who would continue to pay the premiums until he died.

That would seem to make everybody happy; the seller, who got $2 million while alive and the investors, who'll net $5 million (minus the premiums) when the seller passes on. But not insurance companies, which, the article revealed, factor into their actuarial tables the very good chance that the elderly will default on policies at the end of their lives and no one will be able to collect on them, regardless of how much was paid into the plans before they lapsed.

The morality of the new speculation opportunities aside, it's appalling for consumers to learn that companies want their policies to lapse and hope they will when the insured are most vulnerable. Numerous studies show the last six weeks of life are likely to be a person's most hospitalized, and putting a check in the mail may not be the highest priority or even possible at that point. That's to say nothing of Alzheimer's patients and others who simply forget.

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With the new speculation in life insurance growing in popularity, companies express worries that premiums for everyone will rise because companies will actually have to pay benefits for the policies they write.

Isn't that why we buy life insurance?

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