After sub-prime mess, wall street is gearing up on a new exotic product – Death Bond that is tied to securitization of the life settlement policies. New York times covered an interesting article on this exotic investments that seems to picking up the flair in the street. Click here to read the original article.
The bankers plan to buy “life settlements,” life insurance policies that ill and elderly people sell for cash — $400,000 for a $1 million policy, say, depending on the life expectancy of the insured person. Then they plan to “securitize” these policies, in Wall Street jargon, by packaging hundreds or thousands together into bonds. They will then resell those bonds to investors, like big pension funds, who will receive the payouts when people with the insurance die.
Sub-prime was tied to performance of real estate market but death bond is tied to mortality. According to few industry experts, life settlement securities are the best investment because they are immune to performance of stock or bond market, interest rates increase/decrease have no impact on the value of the securities. Also they seems to have averaged over 10% return each year, and most of the sellers were approximately 78 to 80 years old. Taking into account the current unemployment rate which is 26 year high where five million workers are unemployed for more than 6 months and out of that 2.5 million are unemployed for more than a year. Also, if the unemployment statistics is grouped by age then majority of them are above 45, then this will tempt many people to sell their life insurance policies for cash.
Times noted that a major investment bank has developed a tradable index of life settlement that will allow people to bet on whether people will live long or not.
