What happens when actuaries are wrong?

My buddy Dr. Marcus Martin from the J. McDonald Institute here in Dallas has an interesting idea about how to build wealth in the Black community. Get young Black men life insurance policies. The basic premise is that Black men die earlier than most other demographics in the US and for young Black men in urban areas the death rate is much higher than those of other races from other demographics. If we encouraged young Black men to get insurance policies, then their families could benefit financially from these very unfortunate, premature, and statistically predictable deaths. Also, if insurers started to pay out policies this would get their attention and perhaps we all would see our connection to these young men to the point where we might put a bit more effort in a solution. A noble idea and creative plan.

On Monday I had the opportunity to visit Memphis to check out the Church Health Center with Marcus, Jim Walton, and Albert Black. On the trip we discussed Marcus’ idea. I mentioned that I used to work with a few actuaries during my job at The Travelers in Hartford during undergraduate school. I mentioned that they were pretty bright folk that would recognize the trend and figure out how to charge higher premiums for these ‘at risk’ Black men. I didn’t think they would calculate incorrectly. I dunno the law here but even if this is illegal they would figure out a way to get around it.

They aren’t gonna lose money on this, but what happens when actuaries are wrong??

I recently read a story about a real AIDS patient who bought a life insurance policy back when she was originally diagnosed in the early 90’s and has essentially ‘outlived’ the actuaries. Now the company that helped broker her policy wants to back out because she is outliving the financial model. Her staying alive is costing them money.

The anonymous patient from Philadelphia “M. Smith” at the time of learning of her HIV status was reasonably healthy and never suspected that her ex-boyfriend had HIV and infected her. However when he died from AIDS complications she knew he was responsible. She, like many others at the time and even now, viewed this diagnosis as a death sentence and she wanted to get her affairs in order. M. Smith, who was single with no children, was leafing through POS and saw an ad offering to buy her existing $150,000 life insurance policy. The company, Life Partners, would pay her $90,000 up front and cover her combined life and health insurance premiums if she lived longer than two years. When she died Life Partners would collect the full value of the policy, at a potential 60% profit. The sooner she died the higher the profit. She signed the contract in 1994 and neither she nor the actuaries at Life Partners thought she’d still be alive some 12 years later.

Quick aside, isn’t there a bit of irony in a company called Life Partners that is in business to profit from it’s client’s deaths? Anyway…

Like most businesses Life Partners doesn’t like losing money so last August, the day her premium was due, Life Partners sent her a letter saying they ain’t gonna pay her life insurance premium no more. They demanded in the letter that she pay the premium herself. M. Smith had recently turned 50 and now has cancer, her premiums have jumped to $29,000 a year, money she doesn’t have. M. Smith hired a lawyer and when Life Partners was pressed the company president agreed that they would pay her premiums because they were ‘contractually obligated’ to do so. Where was the obligation when they sent her the letter?
Anyway, Smith and her lawyer are still wary because at other times in the past Life Partners has threatened to abandon the contract which would essentially void the life insurance policy. Smith claims these threats cause her additional stress and jeopardize her health.

Of course there is still no cure for AIDS but with new medications that are readily available Magic’s case becomes far more common. These new interventions are very effective of prolonging the lives of HIV positive folks. The AIDS Law Project in Pennsylvania has said that the actuaries in companies like Life Partners never considered that a relatively quick AIDS death might not be a sure bet. Companies like Life Partners continue to pay hundreds of thousands of contracts they negotiated during the 90’s, money that of course cuts into their profits. As we’ve seen companies will go to great lengths to avoid this.

I like Marcus’ idea, I just think that life insurance companies will likely respond very quickly if ‘at-risk’ young Black men start buying life insurance.