Speculating on Life and Death… and Cryptocurrency
November 23, 2022
“The following article references an opinion and is for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.”
Gambling and investing in the stock market are both known as speculative risks. In fact, there was a time when some folks used life insurance as a speculative risk until the Life Assurance Act of 1774 sought to stop applicants from purchasing life insurance for the purpose of wagering or speculating on human capital in order to benefit from the misfortune of others.
To this day, you can’t buy insurance on the life of, let’s say, a foolhardy daredevil who does wheelies (blindfolded, yikes!) up and down your otherwise tranquil laneway. Although you may be thinking, ‘surely, he’s not long for this world’ and maintain a legitimate interest in his antics, you still would not have what’s known as an insurable interest.
Financial underwriting, which first functioned to confirm an applicant’s relationship to the person being insured in order to evaluate the insurable interest, today also looks to an applicant’s ability to pay for the insurance and seeks to avoid over-insurance which has proved to increase the risk of many an unfortunate event where the insured is considered, as they say, ‘worth more dead than alive’.
Many are familiar with health underwriting, where insurance companies inquire into your health and medical history to determine if you’re a suitable risk for life insurance. The higher the insurance applied for, the deeper the scrutiny by underwriters. So too with your financial circumstances. Everybody must qualify for life insurance – both medically and financially. Even the simplest of insurance applications undergoes some level of financial underwriting. In fact, occupation, net-worth, insurance need and insurable interest are staples of every underwriting review. And, for a life insurance amount that’s say, 1 to 10 times your annual income, underwriters may feel satisfied knowing that that you’re employed and need to replace your income in the event of your death to meet legitimate financial obligations. However, if you apply for an insurance amount that’s say, 100 times your annual income, your finances will have some explaining to do. Or if you’re applying for any large amount of insurance, even to cover the most legitimate of needs, financial underwriters are required to do a fairly deep dive.
The higher the insurance amount applied for, the more thorough the financial underwriting – with extra attention paid to the financial information provided, including the nature of your net worth – right down to the types of investments and currencies you hold. Volatility, market speculation and low regulation investments can often result in an underwriting decision reading ‘prefer not to participate’ or ‘can only offer a reduced sum of insurance’.
So, what about cryptocurrency? How does it fare in the eyes of today’s financial underwriter? Cryptocurrency, not brand new but still a relative newcomer in global finance, at first seemed to financial underwriters like a throwback to a time of little or no financial regulation, rampant speculation and volatility. One added concern of the early crypto era has been its’ potential appeal as a facilitator or conduit for illegal activity. A definite non-starter for underwriting.
More recently, however, the mainstream financial world is learning that cryptocurrency and equity markets rely on a number of common conditions such as supply, demand, monetary policy and geopolitics (1). The roller-coaster volatility of cryptocurrency stocks often leads to financial news stories, but only time will tell if some are consistently able to weather economic storms with a measure of resiliency.
The horizon? Some financial underwriters are considering modest amounts of cryptocurrency in a person’s asset base if there is a solid, more traditional financial background and no other concerns. The development of government mandated digital banks known more formally as CBDCs (central bank digital currency), a handful already in business and being evaluated here in Canada, may help ease concerns (2). Central bank regulation may be able to allay concerns related to legitimacy and even bring a measure of competition to the current crypto market, a very underwriting friendly move.
But for now, one can only speculate on the future of cryptocurrency and the impact that large holdings may have on an applicant’s eligibility for life insurance down the road.
1. Sharma, Rakesh. Is There a Cryptocurrency Price Correlation to the Stock Market? Investopedia.com. May 12, 2022.
2. Canadian Foreign Exchange Committee. Central Bank Digital Currency and Stablecoins. Bank of Canada. June 2021.