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August 20, 2007

Death bonds

The financial markets are always coming up with innovations and new products. N.C. State University economist Mike Walden explains one of these innovations -- one that's popularly known as a death bond.

"Well a market has arisen whereby that person owning the life insurance policy can actually sell the policy to an investor and get cash for it. The cash will be somewhere between 20 to 40 percent of the death benefit. The investor then continues to make payments on the life insurance policy, but then when the initial owner of the policy dies the investor collects the full amount of the death benefit," Walden continues.

"And since they paid only 20 to 40 percent of it, and they are going to get 100 percent of the death benefit, that's where the investor has made money.

"Now some people ... call these death bonds because the investor is not going to make money until the original owner of the policy dies," he concludes. "But ... as an economist, I tend to look at this more as, well, this is a trade that's mutually beneficial. The owner of the policy needed the cash, an investor wants to earn some money, and the two meet and they are both better off with the trade."

Posted by deeshore at August 20, 2007 08:00 AM