Death Bonds

Death Bond is shorthand for a gentler term the financial industry prefers: life settlement-backed security.

Whatever the name, it's an investing concept cooked up by Wall Street to fill a need of the aging Baby Boomer generation.  Some 90 million Americans own life insurance, but many of them find the premiums too expensive; others would simply prefer to cash in early.  "Life settlements" are arrangements that offer people the chance to sell their policies to investors, who keep paying the premiums until the sellers die and then collect the payout.

G. Andrew Karolyi, a finance professor at Ohio State University's Fischer College of Business who specializes in international markets, says Wall Street's interest is predictable given the "demographic bubble" of aging Baby Boomers, many of whom will be looking to cash in insurance policies.  "For investment banks," he says, "all of this sounds like an opportunity to make money."

How a Life Insurance Policy Becomes a Death Bond

The seller: A person, typically 70 or older, who wants to cash out of a life insurance policy hires a "life settlement" broker to find prospective buyers.  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 broker: A person paid to link buyers and sellers, this player typically seeks three bids from specialty finance firms called life settlement providers, which are often financed by hedge funds and investment banks.  Commissions, paid by the seller, usually range from 5% to 6%.

The provider: 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.

The investment bank/hedge fund: After a bank or hedge fund collects a sufficient number of policies, typically 200, it turns them into asset-backed securities called death bonds to sell to investors.  The pitch: Death bonds will produce steady returns (around 8%) and aren't correlated with stocks, bonds, commodities, or other investments.

The investor: Hedge funds and other big investors are already buying up death bonds in Europe and expect a big bond issue in the U.S. soon.  Institutional investors are especially attracted to uncorrelated assets, which make their portfolios less volatile.

The bond rater: Big debt-rating agencies, such as Moody's Investors Service and Fitch Ratings, are soon expected to start issuing ratings on death bonds in the U.S. opening the market to other big investors including mutual funds.

Source: BusinessWeek, July 30, 2007

Come to the Summer Carnival!

The first Baby Boomer, A New Jersey mother and grandmother turned 61 on New Year's Day, 2007 and she has the distinction of being the very first Baby Boomer.

Kathleen Casey-Kirschling, of Cherry Hill, N.J., was born one second after midnight on Jan. 1, 1946. During this era, an American baby was born every eight seconds.

Visit the Blogging Boomer Carnival #31 and join other boomers in taking the rides of their life.

The first Baby Boomer, A New Jersey mother and grandmother turned 61 on New Year's Day, 2007 and she has the distinction of being the very first Baby Boomer.

Kathleen Casey-Kirschling, of Cherry Hill, N.J., was born one second after midnight on Jan. 1, 1946. During this era, an American baby was born every eight seconds.

Visit the Blogging Boomer Carnival #31 and join other boomers in taking the rides of their life.