Chapter 1 — An Emerging Market

• Guaranteed cash values are calculated assuming the insured lives to the policy’s endowment age — a statistical rarity — creating a distortion between cash value and the policy’s true economic worth
• The distortion is even more pronounced when the insured’s health is impaired, since the insured is unlikely to live to the endowment age
• Insurance companies’ monopsony power (sole buyer) allows them to enforce a below-market valuation based on assumed perfect health
• Approximately 40% of life policies issued in the U.S. terminate without paying a death benefit — 4 out of 10 policies are effectively bought back by insurers at below-market prices
• The secondary market corrects this distortion by introducing competitive buyers, giving policyholders a third option between cash surrender and holding to death

While the Armstrong Commission’s non-forfeiture rules addressed the outright appropriation of policyholder assets by insurers, guaranteed cash values still contain a significant economic distortion. Because they are calculated assuming the insured lives to the policy’s endowment age — a statistical rarity — they routinely undervalue the true economic worth of a policy, particularly for older or impaired insureds.

Consider a simplified example:

The gap between the $100,000 cash surrender value and the $500,000 death benefit is dramatic. That gap is caused by two factors: the cash value calculation assumes perfect health through the endowment age, and there is only one purchaser — the insurance company.

Now suppose a third-party buyer is willing to purchase that same policy today for $350,000. The buyer assumes responsibility for any future premium payments and names himself as beneficiary. When the insured dies, the buyer collects the death benefit and earns a return on the investment. The original policyholder:

• Is relieved of future premium payments
• Receives $250,000 more than the insurer’s cash surrender value
• Can invest or use those funds immediately

The trade-off is clear: the original beneficiary receives nothing under the policy. That is a consideration the policyholder must weigh carefully — but for many, the immediate cash may outweigh the future benefit to heirs.

Because guaranteed cash values assume the insured will live to the policy’s endowment age — which statistically very few people reach — they systematically understate the policy’s true value. That distortion is even more pronounced when the insured’s health is impaired. Insurance companies’ monopsony power — as the only buyer in the traditional market — allows them to enforce this below-market valuation on a take-it-or-leave-it basis.