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Opinion

Death bonds: The perils of sub-prime death

The US secondary market in life insurance is being extended to sellers who can ill afford to relinquish their policies.

Life settlements, whereby people over the age of 65 can cash in their life insurance policies with a third party, are, on the surface, a means of creating a more efficient market. A senior no longer wanting to hold a policy can sell it to a life settlements buyer rather than allowing the policy to lapse or cashing it in with the life insurance provider for a small amount. The buyer then pays the premiums for the rest of the policy’s life – that is, until the seller dies – and then collects the benefit (hoping that the seller dies sooner rather than later).

It is a small but growing market, with many banks looking to join in and potentially securitize the underlying policies and sell so-called death bonds. The secondary market is growing by about $1 billion a year in the US, and some forecasts suggest that it will be a $160 billion market in several years.

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