Death Bonds

Saw this title on the cover of current issue of BusinessWeek today in dentist's office. It not only caught my eyes, but also sent a chill down my spine --- given that my dentist was sharpening her gears at that time...

Anyhow, here is how the security, which is formally known as Life Settlement Backed Security, works:

• Life Insurance policy holder pays insurance company premium for the eventual big payout on the policy holder's death.
• With a "death bond" market, the policy holder now can sell his policy to a third party (life settlement broker) at any time.
• The investment banks, hedge funds will then purchase the policy from the broker and continue paying the premium on that person's policy and will receive the payout on his/her death.
• Very much like an MBS, the bankers will then pool individual life insurances together, and then issue bonds backed by cash flows on these policies.
• According the the article, the return can be attractive --- close to 8%, located right between bond and stock returns. And more importantly, the return on death bonds is completely uncorrelated to the equity and bond market. If you are a firm believer of EMH and "the market portfolio", this is golden!