Everyone is familiar with the principle of life insurance – to guard against the loss of a loved one and his/her earning power. The life insurance companies operate very much like a gambling casino using statistical laws to guarantee a certain amount of profit no matter what. Certainly when I started out with a young family and no savings, I bought life insurance to protect my family in case of my untimely death. However, now that I have reached a ripe old age, sufficient retirement income, and financially independent children, life insurance becomes superfluous. Thus, the question becomes “what to do with one’s life insurance?”. If it is term life insurance, the kind usually provided by your employer, the solution is simple. You simply stop paying the monthly premium and the insurance expires. However, most life insurance in the US are the so-called “straight life insurance” which carries a cash or surrender value, i.e., if you cancel the policy after a certain number of years, you actually get back certain amount of money based on the premium you paid over the years.  However, the amount usually is rather small. For example, if you bought a $10,000 straight life policy at age 25 and paid premium say, $200/year until you are 65, you may get back $4000.00 at 65 if you cash in or surrender the policy. On the other hand, if you bought a term life policy for the same amount you may only pay $100/year. And if you invested the difference of $100/year in a savings account, you will have considerable more at 65 than the $4000 the insurance company will give you.

Anyhow, the reason I mention all this is some new twists on the question above ““what to do with ones life insurance?”.  Apparently there are people who are willing to gamble how long you will remain alive. They will take over the paying of your life insurance premiums in return for becoming the beneficiary of your policy when you die. Furthermore they will pay you a lump sum immediately which is considerably larger than the cash value of the policy and more equal to the value of saving described above. The idea is this. Statistically, a certain number of 65 years old will die every year. Some will die in a few months some may live another 20 to 30 years. Thus, the people who make such a deal with you sort of operate as a life insurance company is reverse. They will get the money when you die but they assume the obligation of paying your premium every year as long as you are alive. In the mean time, you get an immediate payment which is more than if you cashed in your policy with the insurance company. Thus, these deal makers which are often investment pools or companies have an incentive to see your early death. What a strange but profitable idea! Life insurance company of course wishes you live forever so that they never have to pay.

Another fear of old age is that you might out live your savings. What if you lived so long that you exhausted your retirement savings. Currently many average Americans are in this predicament not because of increased life expectancy but because they saved so little. Anyhow another form of gamble on how long you will live is possible called “longevity insurance”. The idea is again simple. While you are young you pay into a policy yearly or in one lump sum certain amount of money. You won’t get any return on the money you paid into such a policy unless you live beyond certain age, say 85. The policy will pay you as long as you remain alive after 85 until you die. This way you never have to worry about living too long and becoming a burden on your children or society.  Of course, you can say why don’t I simply start saving early and be self-insured. The attractiveness of such a policy is the fact that should you live long enough, you enjoy the additional benefit of the premiums paid by persons who die early. Thus, it is another form of gamble on how long a person will live.

The world is full of uncertainties. And there are always people willing to assume the risk of uncertainties for a chance at profit. The risk averse people can transfer such uncertainties to other people and replace them with certainty for a fee. Everyone is happy from their own point of view and social goods are achieved. Another simple illustration of the mathematical theory of nonzero sum cooperative games that I discussed in my earlier series on game theory.