Death Bond

A death bond is a type of asset-backed security (ABS) that is created by pooling transferable life insurance policies and then repackaging them into bonds and selling them to investors. When the seller(s) of a death bond dies, the buyer(s) receives the insurance policy benefits.

How a Death Bond Works

Existing life insurance policies (known as viaticals) are purchased by life settlement companies and sold to financial institutions, who repackage them to create the investment product known as a death bond. The settlement company will pay the seller more than the insurance policy's cash surrender value (the death benefit, which is always less than the face value).

A death bond is similar to a mortgage-backed security (MBS), except that it is backed by life insurance policies, which are then combined, repackaged into bonds, and sold to investors.

Death bonds can be traced back to 1980s viatical settlements. As the AIDS epidemic spread, terminally ill patients sold their life insurance policies to pay for desperately needed, expensive medications. Their policy payments were assumed by the purchasers, who would be paid in full when the patients died.

Death bonds are unusual instruments because they are less vulnerable to traditional financial risks. The underlying insured person bears one risk of holding a death bond. If the individual lives longer than expected, the bond's yield will begin to fall. Because death bonds are created from a pool of assets, the risk associated with a single policy is spread out. The spread of risk makes the instruments more stable.

Viatical Settlements

A death bond is frequently securitized by pooling viatical settlements. A viatical settlement is an agreement in which a terminally or chronically ill person sells their life insurance policy at a discount from its face value in exchange for immediate cash. The seller of the life insurance policy gives up the right to leave the policy's death benefit to a beneficiary of their choice in exchange for the cash.

A viatical settlement buyer pays the seller a lump sum cash payout as well as all future premiums on the life insurance policy. When the original owner dies, the buyer becomes the sole beneficiary and receives the full amount of the policy.