Credit Default Swaps on Human Lives

One of the objections* to credit default swaps was that you could buy a bet on an asset, even if you don't own the asset.

Interestingly, there is an emerging trend that is disturbingly similar, only moreso. EE buddy G. Rossman sends a link to a paper that describes the practice of buying life insurance policies....on strangers. The analogy is disturbing, perhaps, but not inaccurate. There is little moral hazard in me having a life insurance policy on ME, because I "own" me. But what if I have a contract that pays me a lot of money if YOU die? And I am a complete stranger...

It is certainly an interesting question, and disturbingly similar, now that I think on it, to selling organs. Consider:

1. I decide that capital markets are imperfect, and that a considerable benefit will accrue upon my death to some person who gets my kidney. But I want access to those funds NOW. So I make a market to solve the imperfection, selling a right to my kidney, or selling my kidney now, to someone who needs a kidney and will pay a lot of money.

2. I decide that capital markets are imperfect. I have a fully paid up whole-life insurance policy that will pay a substantial sum to my designated beneficiary upon my death. But I want access to those funds NOW. So I sell a portion, or all, of the death benefit to the highest bidder, almost certainly a stranger.

Now, #1 is illegal. Should #2 be illegal? On what grounds? Is it because we would say that such a transaction is not euvoluntary, because the person selling the rights to the life insurance benefit must have no other viable means of raising capital?

(*The other objection to credit default swaps was that cds's were treated as insurance policies, but there were no requirements on reserves or laying off risk. So, AIG famously took $500 billion in bets that the housing market would never decline even as much as 5%, as was made famous in the movie, "Margin Call." A real bookie NEVER makes a bet, and uses the line or odds or something to clear the market on both sides of any bet, so the bookie's position is neutral with respect to risk. Then the bookie makes his cash from the vig. AIG did NOT act like a bookie, but instead had a huge position on one side of a bet. Efficient markets theory would say only an idiot would do that, and so no regulation is necessary. The cds and AIG incident raises the question, "But what if smart people hire physics grads who are actually idiots when it comes to understanding real markets?" Again, efficient markets theory says they WON'T do that. But.... they did.)