Death Bond

What Is a Death Bond?

A death bond is a type of asset-backed security (ABS) derived by pooling transferable life insurance policies, which are then repackaged into bonds and sold to investors. When the seller(s) of a death bond kicks the bucket, the buyer(s) receives the benefits from the insurance policy.

How a Death Bond Works

Life settlement companies purchase existing life insurance policies (known as viaticals) and afterward sell them to financial institutions, who then repackage them to make the investment product called a death bond. The settlement company will pay more than the cash surrender value (the death benefit, which is in every case not exactly the face value) of the insurance policy to the seller.

A death bond is like mortgage-backed securities (MBS) then again, actually they are backed by life insurance policies which are then combined, repackaged into bonds, and afterward are at last sold to investors.

Death bonds can trace their beginnings to viatical settlements during the 1980s. Prodded by the beginning of the AIDS scourge, terminally ill patients sold their life insurance policies to pay for their frantically required, costly meds. Their policy payments were taken over by the purchasers, who might receive the policy paid in full when the patients kicked the bucket.

Death bonds are unusual instruments since they are less impacted by standard financial risks. One risk of holding a death bond lies with the underlying insured person. Assuming the person lives surprisingly lengthy, the bond's yield will start declining. Notwithstanding, on the grounds that death bonds are made from an underlying pool of assets, the risk associated with one policy is spread out. Diffused risk makes the instruments more stable.

Viatical Settlements

A death bond is frequently securitized from a pool of viatical settlements. A viatical settlement is a game plan where somebody who is terminally or constantly ill sells their life insurance policy at a discount from its face value for ready cash. In exchange for the cash, the seller of the life insurance policy gives up the right to leave the policy's death benefit to a beneficiary of their decision.

The buyer of a viatical settlement pays the seller a lump sum cash payout and pays generally future premiums left on the life insurance policy. The buyer turns into the sole beneficiary and cashes in the full amount of the policy when the original owner passes on.

In many states in the U.S., companies that buy viatical settlements to sell to investors are licensed by state insurance commissioners. For additional data and a rundown of state insurance regulators, visit the National Association of Insurance Commissioners (NAIC).

Benefits and Disadvantages of Death Bonds

Pros

Death bonds can provide diversification for investors with holdings in commodities, housing, and other financial markets.
They have a high yield that is not impacted by market forces. Indeed, if the seller of the life insurance policy dies earlier, the buyer will benefit.
Death bonds offer tax-free income; life insurance policies carry neither capital gains taxes nor regular taxes because they are typically used to pay the funeral expenses of the deceased.

Cons

The returns on death bonds are modest. They are generally higher than U.S. Treasuries, but less than equity investments.
Some have expressed concerns about death bonds and the securitization of life insurance policies, drawing comparisons to the collateralized debt obligations (CDO) that contributed to the subprime meltdown and the collapse of the housing market in 2008.
Since there are no regulations or requirements for the industry, virtually anyone can hang a sign on their door and become involved in the life settlement business. This lack of oversight makes it very difficult for investors to get enough information about how risk-appropriate death bonds will be for their portfolio.

## Highlights - A death bond's yield is connected to the insured person's longevity. - A death bond is an asset-backed security (ABS) derived by pooling transferable life insurance policies, which are then repackaged into bonds and sold to investors. - Death bonds can give diversification to the portfolios of investors with holdings in commodities, housing, and other financial markets.