Death-Backed Bonds

Death-Backed Bonds

Bonds are financial securities that are usually employed in the realm of investing and offer investors a stable and predictable income. A special class of bonds that offer sophisticated risk management and the potential to increase returns are death-backed bonds.

What are Death-Backed Bonds? 

“Death-backed bonds” are a special category of financial assets that combine ordinary bonds with life insurance. They give investors with safeguard against the probability of an early death in addition to the chance to make money. These bonds are made with a payout bond in case the bondholder passes away. A portion of the coupon payments or bond principal is set to the side when a bond is death-backed in order to pay the life insurance policy’s premiums. The life insurance policy purchased on the life of the bondholder often designates the bond issuer as the beneficiary. In the event that the bondholder passes away, the insurance benefits are applied to the bond’s face value or to a predetermined death benefit. 

 

Understanding Death-Backed Bonds: 

In order to serve their objective, bonds with a death guarantee link bond holdings and life insurance policies. When investors buy death-backed bonds, a portion of the coupon payments or the bond’s principal is set aside to pay the premiums on the life insurance policy. This life insurance coverage is purchased on the life of the bondholder, and the bond issuer is designated as the beneficiary. 

In the event that the bondholder passes away unexpectedly, this arrangement is intended to provide additional security. In the event that the bondholder passes away before the bond matures, the insurance benefits are utilised to either reimburse the face value of the bond or provide the issuer with a predetermined death payment. 

Working of Death-Backed Bonds: 

Bonds with a death guarantee operate by combining common bond characteristics with an insurance element. Over the course of the bond, holders of death-backed bonds get periodic coupon payments, just like holders of regular bonds. Through the use of these coupon payments, investors may profit. 

Death-backed bonds stand out because they contain an insurance component. Investors who purchase death-backed bonds contribute a portion of their coupon payments towards the cost of a life insurance policy. The beneficiary of the policy, the bond issuer, uses these funds to pay the insurance premiums. 

Advantages of Death-Backed Bonds: 

  • Enhanced Returns: Death-backed bonds provide the potential for higher yields than conventional bonds because of the added insurance component. 
  • Risk Mitigation: In the event of an early death, the provision of life insurance coverage provides protection, ensuring the financial support of the bondholder’s estate or beneficiaries. 
  • Diversification: Death-backed bonds, which include a fresh asset class, can diversify an investment portfolio and reduce overall risk. 

 

Disadvantages of Death-Backed Bonds: 

  • Complex Structure: As they combine both life insurance and bond investments, death-backed bonds can be more complex to understand than regular bonds. 
  • Limited Market: There is a small market for death-backed bonds, and they might not be widely available in all nations or currencies. 
  • Potentially Higher Costs: Death-backed bonds may incur higher costs than traditional bonds because of their insurance component. 

 

Examples of Death-Backed Bonds: 

  • ABC Death-Backed Bond: The annual coupon rate on this bond from ABC Corporation is 5%. This bond includes a death benefit clause in addition to the customary coupon payments. If the bondholder passes away before the bond matures, a death benefit equal to the bond’s face value will be paid. 
  • XYZ Life Protected Bond: This bond from XYZ Bank combines life insurance protection with a variable interest rate. The insurance payout for this bond is influenced by the bondholder’s age and health at the time of death. In other words, the quantity of the insurance payout is based, among other things, on the bondholder’s age and general health. 

 

Frequently Asked Questions

 Yes, bonds are frequently backed by certain assets or the issuer’s ability to cover principal and interest payments. The specific backing depends on the issuer and bond type. 

Some bonds have movable collateral, such as stock, machinery, or real estate. Since the underlying assets serve as security, these are known as asset-backed bonds. In the event that the bond issuer defaults, bondholders have a claim on the underlying assets to recover their investment. 

 No, not all bonds are backed by assets. Other bonds are asset-backed, which means they are secured by specific collateral such as mortgages or company assets. Some bonds are unsecured, relying solely on the issuer’s creditworthiness and ability to repay the debt. 

 

 The five main types of bonds are:  

Treasury Bonds: These bonds released by governments to pay for costs incurred by the common populace. 

Corporate Bonds: Corporate bonds are securities that firms issue to raise money for a range of purposes. 

Municipal Bonds: These are issued by municipalities or local governments to finance public projects. 

Agency Bonds: These bonds are issued by institutions receiving government assistance, such Fannie Mae or Freddie Mac. 

Asset-Backed Securities: These bonds are backed by specific assets, such as mortgages, car loans, or credit card debt. 

No, losses from bonds are not inevitable. Bond duration, credit quality, and investor holding period are all factors that affect the risk of losing money. Bond values may change along with interest rates and market conditions. A well-balanced investment portfolio can use bonds as a source of income and a tool for diversification. 

Bonds do not have zero risk, though. Even while some bonds, such as Treasury bonds issued by reliable governments, are regarded as low-risk investments, there is always some risk associated with bond investments. Variables like changes in interest rates, credit risk, inflation, and market conditions can have an impact on bond pricing and returns. Investors should thoroughly assess the risk profile of bonds before making an investment. 

    Read the Latest Market Journal

    Back in Business: The Return of IPOs & Top Traded Counters in March 2024

    Published on Apr 17, 2024 242 

    Start trading on POEMS! Open a free account here! At a glance: Major indices continue...

    Weekly Updates 15/4/24 – 19/4/24

    Published on Apr 15, 2024 52 

    This weekly update is designed to help you stay informed and relate economic and company...

    From $50 to $100: Unveiling the Impact of Inflation

    Published on Apr 12, 2024 135 

    In recent years, inflation has become a hot topic, evoking strong emotions as the cost...

    Japan’s Economic Resurgence: Unveiling the Tailwinds Behind Nikkei 225’s Record Leap

    Published on Apr 11, 2024 81 

    Source: eSignal, Intercontinental Exchange, Inc. In the heart of Japan’s economic landscape, the Nikkei 225...

    Weekly Updates 8/4/24 – 12/4/24

    Published on Apr 8, 2024 109 

      This weekly update is designed to help you stay informed and relate economic and...

    What Makes Forex Trading Attractive?

    Published on Apr 2, 2024 190 

    In a world where the click of a button can send goods across oceans and...

    Weekly Updates 1/4/24 – 5/4/24

    Published on Apr 1, 2024 97 

    This weekly update is designed to help you stay informed and relate economic and company...

    How to soar higher with Positive Carry!

    Published on Mar 28, 2024 136 

    As US Fed interest rates are predicted to rise 6 times this year, it’s best...

    Contact us to Open an Account

    Need Assistance? Share your Details and we’ll get back to you

    IMPORTANT INFORMATION

    This material is provided by Phillip Capital Management (S) Ltd (“PCM”) for general information only and does not constitute a recommendation, an offer to sell, or a solicitation of any offer to invest in any of the exchange-traded fund (“ETF”) or the unit trust (“Products”) mentioned herein. It does not have any regard to your specific investment objectives, financial situation and any of your particular needs. You should read the Prospectus and the accompanying Product Highlights Sheet (“PHS”) for key features, key risks and other important information of the Products and obtain advice from a financial adviser (“FA“) pursuant to a separate engagement before making a commitment to invest in the Products. In the event that you choose not to obtain advice from a FA, you should assess whether the Products are suitable for you before proceeding to invest. A copy of the Prospectus and PHS are available from PCM, any of its Participating Dealers (“PDs“) for the ETF, or any of its authorised distributors for the unit trust managed by PCM.  

    An ETF is not like a typical unit trust as the units of the ETF (the “Units“) are to be listed and traded like any share on the Singapore Exchange Securities Trading Limited (“SGX-ST”). Listing on the SGX-ST does not guarantee a liquid market for the Units which may be traded at prices above or below its NAV or may be suspended or delisted. Investors may buy or sell the Units on SGX-ST when it is listed. Investors cannot create or redeem Units directly with PCM and have no rights to request PCM to redeem or purchase their Units. Creation and redemption of Units are through PDs if investors are clients of the PDs, who have no obligation to agree to create or redeem Units on behalf of any investor and may impose terms and conditions in connection with such creation or redemption orders. Please refer to the Prospectus of the ETF for more details.  

    Investments are subject to investment risks including the possible loss of the principal amount invested. The purchase of a unit in a fund is not the same as placing your money on deposit with a bank or deposit-taking company. There is no guarantee as to the amount of capital invested or return received. The value of the units and the income accruing to the units may fall or rise. Past performance is not necessarily indicative of the future or likely performance of the Products. There can be no assurance that investment objectives will be achieved.  

    Where applicable, fund(s) may invest in financial derivatives and/or participate in securities lending and repurchase transactions for the purpose of hedging and/or efficient portfolio management, subject to the relevant regulatory requirements. PCM reserves the discretion to determine if currency exposure should be hedged actively, passively or not at all, in the best interest of the Products.  

    The regular dividend distributions, out of either income and/or capital, are not guaranteed and subject to PCM’s discretion. Past payout yields and payments do not represent future payout yields and payments. Such dividend distributions will reduce the available capital for reinvestment and may result in an immediate decrease in the net asset value (“NAV”) of the Products. Please refer to <www.phillipfunds.com> for more information in relation to the dividend distributions.  

    The information provided herein may be obtained or compiled from public and/or third party sources that PCM has no reason to believe are unreliable. Any opinion or view herein is an expression of belief of the individual author or the indicated source (as applicable) only. PCM makes no representation or warranty that such information is accurate, complete, verified or should be relied upon as such. The information does not constitute, and should not be used as a substitute for tax, legal or investment advice.  

    The information herein are not for any person in any jurisdiction or country where such distribution or availability for use would contravene any applicable law or regulation or would subject PCM to any registration or licensing requirement in such jurisdiction or country. The Products is not offered to U.S. Persons. PhillipCapital Group of Companies, including PCM, their affiliates and/or their officers, directors and/or employees may own or have positions in the Products. Any member of the PhillipCapital Group of Companies may have acted upon or used the information, analyses and opinions herein before they have been published. 

    This advertisement has not been reviewed by the Monetary Authority of Singapore.  

     

    Phillip Capital Management (S) Ltd (Co. Reg. No. 199905233W)  
    250 North Bridge Road #06-00, Raffles City Tower ,Singapore 179101 
    Tel: (65) 6230 8133 Fax: (65) 65383066 www.phillipfunds.com