“Psssst, buddy! Want to buy a death bond? They’re the most exciting, new investment on the street today. Get ’em while they’re hot.” Hardly, at least in Canada, but I saw them pop-up in an article in The Globe and Mail last month. Death bonds are the catchy name for life settlement securitizations that are bundled life insurance policies sold, in this case, as bonds. Profits to investors come from the death benefits paid by the life insurance companies. Death can’t come too soon to maximize returns.
The article quoted life insurers’ ethical reactions to death bonds. Frank Zinatelli, Vice-President of legal services at the Canadian Life and Health Insurance Association that represents most of the life insurers in Canada said, “From an ethical context, you’re betting that someone will die. It doesn’t have the right smell.”
Interesting, but from an ethical context, death has always been the bet for life insurance’s existence. Death bonds are only another variation of the bet. As to the “right smell”? Surely, that has to be in the noses of those sniffing.
Steve Finch, an Executive VP of John Hancock Financial, part of Manulife Financial Corp. had this to say, “It’s not good public policy for investors’ returns to be driven by the early demise of a policy holder.” I’m assuming he’s referring to a public policy that he and his company would like to see everybody accept.
But I can’t help but think that policy owners should be advocating what they think would be a good public policy in this matter, too. Maybe one that’s based on the attitude: “We paid for our policies for years. Now our circumstances have changed. We’ve talked it over with our financial advisors and concluded that we no longer have the need for the death benefits that we once had. Our circumstances are such that it is advantageous to sell our policies to (or through) life settlement intermediaries who will use them to create death bonds or some other investment vehicle. There’s nothing sacred about our insurance policies, they are just another part of our portfolios. They are contracts that simply agree to pay a lump sum or face amount of money when we die. Now that vehicles like death bonds give these contracts an equity value, we would like to use the money from their sale to pursue other personal and financial goals that are now taking priority.”
Since this is Canada, there are bound to be government obstacles to these policy sales. As The Globe article points out, “In Canada, third-party purchases of life insurance policies are banned in six provinces and all three territories.” Privacy issues may create overwhelming problems for some insureds. And disgruntled ex-beneficiaries can always sue. Personally, my biggest concern would be how the Canada Revenue Agency will treat the money I receive through a life settlement intermediary. Is it taxable? If so, how? After all, the face amounts of my personal policies are paid to my beneficiaries tax-free.
Should you ever consider selling your life insurance policy, remember this. If your reason for selling is to free-up some cash because you have a terminal illness, then talk to your advisor first. It’s not well-known, but in Canada most life insurance companies will pay you part of the face amount while you’re still alive if you prove to their satisfaction that you are terminal and death is imminent, i.e. generally, likely to occur within six months. That amount may be enough to tide you over. (I have heard that the size of advanced payments in Canada range from 25% of the face amount and up.) The unpaid balance of the face amount less the interest on the advanced payment will eventually be paid to your beneficiary at your death. The sum of these two amounts is more money than any life settlement intermediary is likely to provide.