Death Bond : Profiting From Mortality

Death bond is a bond backed by underlying assets which is the pool of unwanted life insurance policy. Usually done by hedge-fund or bank (it seems like they are hedging against insurance company's profits) :) .

At first stage, it is operated by life-settlement company.

What is life-settlement company?

Imagine your grandpa whose age 70.He has a Whole Life Insurance with a face value of RM 100,000 that is payable of course when he died. But your grandpa is running out of cash to further paying the premiums. What he can do is he can sell the policy to the third party called life-settlement company.

Life settlement company will pay to your grandpa some portion of the face value (i.e 20% to 40% of the FV) and the company then continue to pay for the premium on behalf of your grandpa to keep the policy in force until your grandpa died.

When the times come, they company get the total cash value. Of course they will expect your grandpa to die as soon as possible so that the premium paid will be much lesser.

Of course if you gamble for the life of one person, the risk will be higher. A pool of these unwanted policy will spread the risk and consequently give out a stable return (around 8%) to the investors and they aren't correlated with the performance of stocks, bonds, commodities, or other investments.

Before the emergence of life settlements, customers who no longer wanted coverage can either:-

• Stopped paying the premiums.
  

• Sold their policies back to their insurers for a fraction of the potential death benefits--the so-called cash surrender value.
  

Insurers have long banked on and enjoyed on not having to pay on a certain percentage of their policies. According to the Wall Street Journal, the insurance industry earns annually 1.1 TRILLION DOLLARS in lapsed policies. Now a secondary market has emerged. Life settlements eat into those profits.

So what the insurer have to do ?

They're getting into the game. How?

They buy the life-settlements package. By sinking money into the sector, insurers can get back at least some of the money they now have to pay out in death benefits. If someone is going to profit, insurers have realized, it might as well be them.

But , i can't find life-settlement company in Malaysia by "googling" through Google. Do we have one?

Don't you think they(people who sell the policy) are more expose to being murdered? Huhu. Majnun!* .

Can we make an Islamic Death Bond? Muehehe.. You're nuts! Any comments.

*all the data may be in the category of "Sahih" "Daif" or "Maudhu'".
* Majnun means crazy in Arab.

Staying Alive!

C`mon guys, be active in posting new agenda. It can be in any forms (news or story) and we can discuss it all over here. Lets start to make this blog sounds a bit more educational. Start posting something on economics , finance , investment , insurance , mathematics and banking.

For example :

What are the factors that weaken the US dollar ?
The "death bond" ? Life insurance settlement?

It's interesting isn't it? We can be well updated to the current economy.
Do you agree? Please leave some comment. =-)