Q.WHAT ARE DEATH BONDS?
A.Also known as traded life policy investments, death bonds are securitised portfolios of life insurance policies usually issued in countries such as the US and been sold ahead of the policyholder dying. An investor can pay a policyholder a lump sum and agree to keep paying the premiums on the policy for them if they can collect the final payment – and the profit they gain from the investment is higher the sooner the original holder dies. The bonds are a form of bet on the lifespan of the policyholder, but returns can disappear as people live longer.
Q.Why are they risky?
A.Advocates of the bonds claim they are a good way to avoid the movements of equity or bond markets, as the returns are stable and uncorrelated. But a series of scandals involving UK investors, such as Arch Cru, Keydata and ARM Asset Backed Securities lost millions from selling or investing in life insurance backed products. The FSA said several it saw behaved like Ponzi schemes, where yields promised to investors could only be funded through new investors’ capital. Frequently based abroad, the funds are also hard to track and regulate.