What is a Death Bond?
A death bond is abacked by life insurance policies.
How Does a Death Bond Work?
Let's say Company XYZ is a life-settlement provider. A life-settlement provider purchases whole and universal life insurance policies from people who no longer need or want the coverage but want to recoup their in the policies. The sellers receive to use as they wish; the buyer begins making the premium payments on the seller's behalf. In this way, Company XYZ essentially has a policy on the life of the seller.
When the seller dies, Company XYZ receives the death benefits from the insurance policy. Company XYZ purchases many of these insurance policies and eventually has a large portfolio of them. Because the people covered by the policies cash flows (from the death benefits) coming to it over time. Additionally, the cash flows are not correlated to what is happening elsewhere in the markets.die at different times, Company XYZ have a stream of
Company XYZ can securitize this stream of cash flows by pooling the policies and issuing bonds (which Company XYZ uses for business operations and to buy more policies), and Company XYZ gives the investors coupon payments over a period of time. These investments are called death bonds.to investors. The investors give Company XYZ cash for the
Why Does a Death Bond Matter?
Death bonds are macabre death benefit.that are also very novel and controversial. On one hand, the insurance holders can receive much-needed to retirement or pay medical expenses while they are still alive. On the other hand, one of the many controversial aspects of death bonds is that the sooner the insured dies, the higher the returns are for the investors (after all, Company XYZ does not have to keep paying the insurance premiums for the person). From a financial perspective, there is certainty that payments come -- after all, everybody eventually dies. The risk, therefore, is that Company XYZ will not pass through the payments as promised or that the insurer will withhold the