Believe it or not, you can earn money from death bonds.

Backed by life insurance, a death bond pools together many transferrable life insurance policies to convert it into interest-bearing instruments. Introduced in the 1980s, policyholders decided to sell their policies to earn upright money, known as viatical settlements. During that time, terminally ill patients had to settle their costly hospital bills and medicines. So they started selling their insurance policies in exchange of a one-time cash payment.

Similar settlements remain present today, but are replaced by life settlements where seniors 65 or older, who are not severely ill, sell their insurance policies. Under this arrangement, the purchaser becomes the beneficiary and continues paying the premiums. These settlements are grouped together to make death bonds, which are then sold to pension funds and the like. Hedge funds, backing companies that purchase insurance policies, are key players in the life settlement market.

Now, let us weigh the pros and cons of death bonds.


Asset Allocation. A death bond is a good vehicle for diversification, which is good for a portfolio. This derivative does not take into account the market as people die all the time regardless of the overall health of the economy or the stock market.

High Yields. Referring to the explanation on asset allocation above, no economic force affects the bond’s high yield. The buyer actually benefits if the seller of the life insurance policy dies sooner rather than later. It is safe to say the payout comes in a matter of time.

Tax-free Income. Life insurances carry no capital gains taxes or regular taxes as these are usually used to take care of the funeral expenses of the deceased.


Dealing with Death. To gain from this investment, people need to die. It is eerie to know you are profiting from a person’s death.

Inaccurate Earnings. Policies are rife with erroneous earnings numbers and the policyholder’s net worth because the person, under the stranger originated life insurance, is talked into buying an insurance for someone else.

Lack of Regulations. There is no regulation encompassing life settlements as of now. However, the National Association of Securities Dealers released a notice about regulating life settlements.

Little Information. Since most life settlement firms are privately held, information is not readily available to the general public. Obtaining details about these firms is a tedious task for investors.

Scams. The industry has lots of scammers. Moody’s pulled a rating from a death bond because its creators were charged with fraud. Typically, fraudulent activities come from shady brokers who employ high-pressure schemes to sell their policies to people without the latter knowing all of the consequences.

Tax Laws. With its growing use and popularity, expect Congress to enact a law regarding death bonds someday.