Death Bonds

Death bonds, also known as viatical settlements or life settlements, have been a small part of the insurance business for many years.  More recently, they have gained greater attention and have been pushed hard as interest from Wall Street has increased significantly.

A life settlement (viatical settlement) involves a third-party purchase of the right to the future proceeds of a life insurance policy (see here for an SEC description).  Since the date of death is, presumably, uncertain, the buyer pays a discount to the face value of the policy.  The benefit to the policyholder is receipt of a significant cash payment prior to death, and the risk/reward trade-off for the buyer is the timing of death.  Potential losers are the future beneficiaries of the policy, and, to a limited extent, insurers who suffer a lower lapse rate or adverse selection.

Wall Street has gotten involved in the business of bundling and securitizing life settlements, and interest from investors has risen sharply.  Business Week has published a summary on the business with a focus on Wall Street's involvement (see here).

While the concept may make sense, in theory, the incentives are questionable.  The opportunity for aggressive and deceptive sales tactics, adverse selection and manipulation are significant, and areas like this tend to attract the worst element.  One example:

Providers…are trying to lure people who don't even hold insurance. In this tail-wagging-the-dog scenario, speculators take out policies on the individuals' behalf, pay them something up front, cover the premiums, and then wait for the people to die so they can collect

Note that this scenario only works if the insured person dies sooner than the insurer expects.  Given these types of tactics, regulators have their hands full.

Brought to you by Tennant Risk Services.

Comments

[Life Insurance Toronto]

Remember one thing: No insurance company will give you free insurance, however, there really are many serious companies that offer reliable schemes.
My advice is, do not go for "too good to be true" insurance schemes.
And ask someone you trust about where to go for a life insurance.