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What is Death Bond ?
DEFINITION of 'Death Bond' A security backed by life insurance which is derived by pooling together a number of transferable life insurance policies. Similar to mortgage-backed securities, the life insurance policies are pooled together and then repackaged into bonds to be sold to investors.
The Origins of Death Bonds
Death bonds come from insurance policyholders that have decided to sell their life insurance policies for up-front money. They can trace their origins to viatical settlements in the 1980s.
During this time, AIDS and other terminally ill patients needed money to pay for their expensive medicines, so they began selling their life insurance policies and were paid an up-front amount. Their policy payments were taken over by the purchasers, who would receive the policy paid in full when the patients passed away. (For more on viatical settlements, read Haunting Wall Street: The Halloween Terminology Of Investing.)
While viatical settlements are still around, they have been replaced by insurance policies sold by seniors 65 or older who are not terminally ill. These cases are often referred to as "life settlements". The reasons why these sellers decide to sell their insurance policies are varied. Usually, they no longer need them or want to continue the payments. The cash they are given up front is a great incentive for a policyholder to sell his or her policy.
Hedge funds are big participants in the life-settlement arena, as they usually will back companies that purchase insurance policies.
A person that decides to sell their life insurance policy usually has one of two options:
- Decide not to continue the payments and allow the policy to lapse
- Take the cash surrender value (usually very low) that the insurance company offers