Many life settlement firms (though not all) withhold personal information when selling the policies, so the investors don’t actually know whose policy they have bought, precisely to avoid the sorts of situations you’re talking about. As long as you’re dealing with one of these reputable firms (Larry King wasn’t, apparently), you probably don’t have much to fear on that score.

As for COLI, the company is paying all the premiums on the life insurance; it’s not clear to me what’s wrong with collecting the benefits. Nothing prevents the employee from having his own insurance (and many employees have employer-provided life insurance; I do for one) and it has no effect on his own insurability. In most of these cases, the insurance isn’t bought for insurance purposes anyway. However, many companies do buy life insurance on their key employees to protect themselves against losses if he suddenly dies. (There’s a good chance Microsoft has a policy on Bill Gates, for example.) I don’t see why it’s unethical for them to do this.

However, I can certainly see the argument against allowing a company to insure an employee (with themselves as beneficiary) without his knowledge or consent. And most states have changed the laws to require this. I am reasonably sure that there has never once been even a suspicion of any foul play in these sorts of policies. Murdering your own employees (or even ex-employees) is rarely a sound business practice.

I’ll have a very poor opinion of an employer who would even think of collecting the insurance proceeds for itself. The proceeds should be given to the family of the deceased.

The concept of people selling their policies, and having their “investors” running around hoping that the insured will “die”, this just boggles the mind.

Just like farmers fertilising their farms to make their plants better, and companies spending money on advertising their products, the above” investors would be thinking hard of how to speed up the process of collecting on the proceeds.

Doesn’t it look very much like the lucrative hard drugs industry?

By the way, I read Fitch Ratings warnings (mentioned in the Post article) about the risks to life insurance caused by the secondary market. Their analysis was that the primary risk is that such settlements could cause the government to withdraw the tax advantages of life insurance. I hadn’t thought of that, and I do concur with their judgment.

When saving and investing for such deferred compensation, corporations have a choice between normal fully taxable investments and life insurance where the proceeds are tax-free (within certain prescribed limits), but they have to pay COI (cost of insurance) charges. As long as the COI charges are smaller than the taxes, that’s what they’ll buy.

It should be pointed out that the company doesn’t even particularly care about getting paid on these policies when the person they’re insuring dies (though it’s certainly quite a windfall if it happens). It’s really being used as a Variable Universal Life policy, i.e. for the investments, not for the payoff at the end. Wealthy individuals, even single ones, often have life insurance policies for themselves for the same reason, to provide retirement income, not for the death benefit. Ideally, the company wants the COI charges to be as low as possible. The lowest COI charges go to the youngest people, as you would expect. This is why Walmart was insuring young employees. They kept tabs on the employees (even after they quit) for bookkeeping, so they knew when to submit a claim (these are whole life policies and you’re guaranteed to eventually cash in), but it’s simply not true, as some people allege, that they were breathlessly waiting for these people to die. The face amount of the policy is always very much a secondary consideration.

The law on these policies has been changed in most states so the companies must insure one of the executives who is actually participating in the deferred compensation plan, rather than just any employee.

As for the Larry King thing, I wouldn’t worry about life insurance companies. The secondary market will only have a very tiny effect on premiums. It may (or may not) lower lapse rates which could cause premiums to rise slightly, but I don’t see very much increase in risk from these types of transactions, unless it actually tempts people to start committing murders. I don’t regard this as very likely.