Posted in Finance, Accounting and Economics Terms, Total Reads: 396
Definition: Death Bond
Death Bond is a bond formed by pooling life insurance policies. These are very similar to bonds formed by pooling mortgage backed securities together. The purchaser of the death bond pays a premium and receives the returns when the insured person dies. The risk associated with such a bond is very less because every person dies at some point.
Also, most of these insurance policies are purchased from terminally ill people. However, if the person lives longer than expected, then the yield on the bonds keeps declining. This can be mitigated by pooling a number of such bonds together such that the risk on one individual bond is spread out. Another possible risk is that of the insurance company cancelling the policy if an individual does not disclose some pre-existing condition.
Death bonds were considered to be a safe form of investment after the Financial crisis of 2008. However, most of the investors did not earn the returns they expected to earn from them. The market for these bonds has increased again in the recent years; some large companies might even get their death bonds rated by Moody’s and Fitch. Death bonds are not rated by any organization, which makes the industry poorly regulated.