What it is:
How it works/Example:
Let's say John Doe has a life insurance policy that he no longer needs. He's decided that he has saved enough for retirement, his children are grown and out of the house, and he is comfortable with the assets he'll be leaving them when he dies. John doesn't need to leave his kids any more
Company XYZ is a life-settlement provider. A life-settlement provider purchases whole and policies from people who no longer need or want the coverage but want to recoup their in the policies. The sellers receive cash 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.
John Doe sells his policy to Company XYZ. When he dies, Company XYZ receives the death benefits from the insurance policy.
Why it matters:
Life settlements are very novel but very controversial. On one hand, John Doe can receive will withhold the .
Life-settlement providers tend to purchase many insurance policies and have a large portfolio of them. Because the people covered by the policies will die at different times, the life-settlement provider will 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.
A life-settlement provider can securitize this stream of cash flows by pooling the policies and issuing to investors. These are called death bonds.