Death bond

Death bonds are securities that are formed from a number of life insurance policies that have been purchased from their original owners by investors and pooled into bonds.^[1]

Advantages

Death bonds are considered to be a relatively low-risk investment because everyone will eventually die, and the fact that many of the individual life insurance policies have been purchased from individuals that are terminally ill. Multiple policies are pooled, which reduces the risk of a decrease in the yield of a policy due to an individual living longer than expected.

Disadvantages

There is a risk that an insurance company will disqualify a policy if the original owner failed to disclose a pre-existing condition. The industry is also considered to be poorly regulated, and death bonds are not currently rated by any major organization.

History

Death bonds are related to the viatical settlements that became popular due to the AIDS epidemic in the late 1980s and senior life settlements that become popular once financiers understood the lapse and surrender rate behavior of individuals in America. Generally, life settlement provider companies buy policies from individuals, and then sell them to hedge funds or investment banks, who transform the policies into securities. The market for death bonds has grown quickly in recent years, from nearly nothing in 2001, to around $10 billion in 2005.^[1] Many states are currently attempting to introduce or tighten regulations on death bonds.^[2] Moody's and Fitch might begin to rate death bonds from larger companies in the near future.

References

1. Goldstein, Matthew (2007-07-30). "Profiting From Mortality". The McGraw-Hill Companies Inc. Retrieved 2009-09-14.
2. James, Andrea (2008-02-17). "Rules proposed for 'death bonds' Life insurance policies sold to third parties". Hearst Seattle Media, LLC. Retrieved 2009-09-14.