Would you sell your life insurance to a stranger? Millions would, and Wall Street wants a piece of the action.

A life settlement is the process by which an individual, usually of senior status or declining health, sells his life insurance policy to a settlement company in exchange for a lump sum. The settlement company then sells the policy or shares of the policy to investors, who then become the beneficiary when the insured senior passes away.

It’s marketed as a win-win because the senior receives an immediate settlement for a life insurance policy he would otherwise never benefit from, and the investor receives the potential for very high returns on his money.

Regardless of what your moral view may be on such a transaction, it is big money and that means Wall Street wants a piece of the action.

Investment banks plan to purchase these life insurance policies, and package them up for resale as bonds to institutional investors – pension plans, hedge funds, etc..

This is very similar to the securitization of sub-prime mortgages in the last decade. The thinking is that the risk of loss (i.e. the original elderly policy holder outlives his policy, and the investors lose money) is spread out among many investors.

As I said, the potential market for this is apparently pretty big. Industry predictions are that the market for these bonds could be a large as $500 billion, and firms like Credit Suisse Group (CS) have been entering the life settlement arena.

Also, Goldman Sachs Group Inc. (GS) has been developing an index of life settlements for trade, effectively allowing investors to bet on whether the insured senior will out live his policy or die sooner than expected.

While the potential for systemic collapse, like that caused by defaults in the sub-prime mortgage business, seems limited there are risks and repercussions involved with life settlement bonds.

For example, the trend of average life span is moving upward suggesting that the odds of the insured outliving the policy rises year after year. Additionally, the fact that the policies are now held by institutions and trusts that have no limit of mortality means that insurance companies will likely being paying out more claims than they would if the policy holder remained the insured. This will likely cause a rise in life insurance rates.

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What will it look like if it does?

If you’re like many workers still lucky enough to have a job during this recession, you’ve probably seen your employer cut or eliminate the contribution match on your 401k plan. Mine did.

My company match on 401k contributions was the first thing cut, just after my bonus and any hope of a raise. That didn’t stop me from contributing though. In fact, I increased my contribution rate to offset the loss of company match, and I am convinced that it is a large part of why my 401k balance recovered so quickly from the crash of 2008.

Regardless of how you may have handled the loss of your company match, it looks like the match may be making a comeback in 2010….

According to this SmartMoney article:

companies are increasingly reinstating this beloved perk. In the next six months, 35% of firms that snipped away at their matching programs are planning to bulk them up again, according to a recent Watson Wyatt survey. That’s up from 24% two months ago.

That’s the good news.

The not so good news is that it likely won’t look like it did before the economic melt down. 13% of employers surveyed said they are planning to reinstate the match at a lower level than previous. Others are changing the criteria for matches, by making them based on company performance. Still others are changing different rules.

17% of the companies bringing back the 401k match say they will be basing it on corporate profits. This will make retirement saving variable and harder to anticipate, especially if you work for a large corporation and have little impact on the company profits.

Other companies are switching to a once per year, lump sum contribution. This change would essentially eliminate the dollar cost averaging aspect of the company match, and if most companies elect to contribute at the same time of year, say the first or second pay period of the new year, then you may even be buying high when your contribution is put to work at a time when millions of other dollars are also streaming into the market.

Some employers also said they are considering a vesting period for the lump sum contribution. This means you could earn your 401k match for two years straight, but if you find another job before the 3rd year (assuming a 3 year vesting period)you could be out your entire contribution altogether.

If enough employers make these kinds of changes, it may be the eventual death of the 401k, since without the company match it pales in comparison to an IRA.

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Earlier, I blogged about how the Dow was having trouble crossing the 10,000 point barrier. The basic premise was that the recent market rally was not due to fundamentals, but rather due to the market previously being over sold.

Well, a recent article from the AP points out that “Alcoa returns to profit as cost cuts”, which I think supports one of my other thoughts on the rally. Namely, that the recent “good earnings” are not a sign of fundamental growth and profitability but rather due to reducing overhead.

“Painful cost-cutting and rising sales to automakers helped the nation’s largest aluminum producer return to profitability for the first time in nine months.”

This is an essential part of the market healing itself, but you can’t cut your way to growth. Unless the fundamentals change, the recent rally is going to run out of steam, if not head back down for a double dip.

I can’t predict the future, but I think this bears consideration and some caution may be prudent.

Still, there is some good news abroad in all this:

“We do clearly see growth, substantial growth … in China,” Alcoa CEO Klaus Kleinfeld told analysts and reporters after the company reported results. “(The) second half of the year is clearly better than the first half in many industries and many regions.”

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The Conference Board said Thursday that its index of leading indicators rose 0.6% in July – its fourth consecutive gain – suggesting the economy has bottomed and the recession will end this summer

Click the image to see the interview.

Barry Ritholtz is the CEO of FusionIQ and author of Bailout Nation, and he thinks that while the economy may have bottomed and the recession may technically end soon, the economy won’t be on solid footing until 3 things happen.

Specifically:

• The economy no longer needs government stimulus to keep from tanking.

• Interest rates are allowed to rise above 0%.

• Massive government intervention in the economy is no longer needed.

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