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How Death Bonds Work

CATEGORY: Death Bonds, How-To

DIVISION: Products, Investments

NOTE: This instructional brief is meant as a quick overview on how Death Bonds work. For more details, consult a professional broker [coming soon to Modern Evil].

Profiting from Mortality

Death bonds may be the most macabre scheme ever. Investors buy up life insurance policies, securitize them, and collect when the insured persons die.

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. Moody's has already rated at least one death bond issue, although it subsequently pulled the rating when the provider was charged with fraud.

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