Death Bonds: Praying for people to Die

Move over Hedge Funds...Here comes the Death Bond!!!

Just when you thought you had seen the most analytical, complex, high-risk alternative investment vehicles from Wall Street, they have yet again come up with a new way to make money. Its called the 'Death Bond' and believe it or not, it involves making money when people die. Mmmm.. I thought something was fishy when I heard that Germany unveiled a 24 hour death channel.

How does a Death Bond work?

Death Bonds (or life settlement-backed security) is created in the following way:

1. A person who wants to cash out of a life insurance policy hires a "life settlement" broker to find prospective buyers to sell his insurance policy.
2. The broker seeks bids from specialty finance firms called life settlement providers, which are often financed by hedge funds and investment banks.
3. The life settlement provider resells the insurance policy to a hedge fund or investment bank, which warehouses it in order to build a big pool of policies.
4. After an investment bank/hedge fund collects a sufficient number of policies (around 200-250), it turns them into asset-backed securities called death bonds to sells them to investors.
5. The The buyers keep paying the premiums until the seller dies, and then they collect. The up-front payout to the seller varies widely, from 20% of the death benefit to 40%.

The mechanics in theory seem quite straightforward: Asset Classes are pooled together and then sold off in the form of bonds or pieces of bonds. When people die, the banks collect. When people die quicker, investors get richer. It is estimated that there are 90 million people in the US with Insurance and this is certainly a temptation for Wall Street. Another big attraction for these types of "Asset Classes" are that they are uncorrelated assets (i.e. they aren't correlated with stocks, bonds, commodities, or other investments) and they are also immune to market risks (interest rates, currency risks etc.) which make the portfolios less volatile.

Well the truth is, at this early stage, there's no way of knowing how popular death bonds might become. I for one do not want anyone profiting from my death. But hey, that does not stop me from watching EoS TV.