What it is:
A death bond is abacked by life insurance policies.
How it works/Example:
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 die at different times, Company XYZ have a stream of 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.
Company XYZ can securitize this stream of cash flows by pooling the policies and issuing to investors. The investors give Company XYZ cash for the 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.