What Is a Death Bond?

A death bond is a type of investment that is payable when a life insurance holder dies. To get a death bond, a life insurance holder will sell his insurance policy and collect on a portion of its full value. The person who bought the life insurance policy is then responsible for paying the premiums until the insurance holder dies. With the investor paying the premiums, the main risk is if the person lives longer than anticipated. People without life insurance can sometimes get a death bond, but this is uncommon.

Many people have life insurance, but the amount is only paid when they die, so they do not get any of the money. With a death bond, life insurance holders are able to get a portion of the insurance’s value by selling the policy to an investor or firm. The buyer typically will take the person’s age, the premiums and the worth of the policy into account before deciding how much to pay the insurance holder.

After giving the insurance holder the death bond, the buyer must pay the monthly premiums on the life insurance. Bond recipients generally like this, because the financial burden of life insurance is lifted from them. Until the bond holder dies, the buyer is legally obligated to continue paying premiums; as of 2011 in the United States, premiums and the insurance’s value typically cannot be upgraded by either the insurance holder or the buyer after the death bond is issued.

A death bond can make a lot of money for a buyer, but there is one major risk. The buyer is obligated to pay all the premiums, and there is a chance the insurance holder will live longer than anticipated. This forces the buyer to continue paying premiums, even if he pays more than the policy is worth. To mitigate this potential loss, most investors buy many life insurance policies.

While a death bond generally is issued to someone who already has life insurance, there is a twist on this investing plan that involves targeting people who are not life insurance holders. The investor will contact someone without life insurance and promise to pay a portion of the life insurance amount if the person takes out a policy. As with the more common version of this investment plan, the investor is liable for all premiums. This means the seller usually pays very little or nothing to receive a bond.