An L bond was a high-yielding debt instrument that financed the purchase of life insurance policies on the secondary market. A type of privately issued, alternative investment, L bonds were created by Dallas-based alternative asset manager GWG Holdings, which ceased selling them, after a previous pause the year earlier, in April 2021. A year later, in April 2022, GWG filed for bankruptcy after accounting issues, client lawsuits, a Securities and Exchange Commission investigation, and the resignation of its auditor stalled efforts to restart sales of the L bonds.
Life insurance protects the policyholder’s beneficiaries in the event of the policyholder’s death. An insured party with a life insurance contract can also sell the policy in the insurance secondary market.
The investor who purchases the life insurance policy becomes the beneficiary after the transaction is settled and is responsible for making the premium payments to the insurance company, and when the original policyholder dies, the buyer receives the payout from the insurer.
Life settlement investors buy life insurance policies in a strategy known as a viatical settlement. These investors aim to make a profit by aligning their expected returns with the life expectancy of the seller. If the seller dies before the expected period, the investor makes a higher return as premium payments cease. Most investors that invest in these life insurance assets are institutional investors.
In the case of L bonds, the issuer used the funds to purchase life insurance contracts that were listed on the secondary market, usually as a result of a life insurance settlement and assumed responsibility for the associated premium payments.
GWG Holdings claimed that an L bond could provide a high yield for the bondholder in exchange for bearing the risk that insurance policy premiums or benefits may not be paid.
Companies issue bonds to secure money to conduct several projects. Lenders who purchase bonds are paid a coupon rate for the duration of the bond’s life. At maturity, the face value of the bond is paid out to the bondholder by the issuing company.
Investors that purchased life insurance policies sometimes financed the initial purchases and corresponding premium payments with L bonds. In terms of life insurance settlement transactions, the money raised from issuing the L bond was used to make the required premium payments to the seller of the life insurance policy.
The L bond was a private placement, a specialty high-yield bond created and issued by GWG Holdings (GWGH), a financial services firm based in Dallas that specialized in alternative assets.
The company purchased life insurance contracts from older adults at a discount to their benefit value. In a viatical settlement, the company may pay an older adult $250,000 for their $1 million life insurance policy and take over premium payments of $30,000 a year.
When the person covered by the life insurance would die, the insurance company pays GWG the $1 million benefit. The funds raised from the L bond were used to purchase and finance additional life insurance assets.
In 2020, the firm’s portfolio held 1,081 insurance policies valued at $1.92 billion in benefits. Of that, about half (46%)—$882 million—were said to be in policies covering people 85 and older.
GWG failed to file its annual report for 2020 and quarterly reports for the end of March 2021. After failing to file its 2020 annual report timely,GWG suspended its offering of L Bonds.Further, several members of the Board of Directors reportedly resigned in the second quarter of 2021. A year later, GWG filed a chapter 11 petition for bankruptcy to address more than $2 billion of liabilities.
A private placement is a sale of stock shares or bonds to preselected investors and institutions rather than on the open market.Relatively unregulated, it is an alternative to an initial public offering for a company seeking to raise capital for expansion. If the issuer is selling a bond, private placement avoids the time and expense of obtaining a credit ratingfrom a bond agency.
No, bonds do not pay dividends—only shares of stock do. Dividends are a portion of a company’s profits, distributed on a per-share basis. However, bonds do make regular payments to those who hold them. Called coupons, these are interest payments—usually at a fixed rate—on the principal amount of the bond.
L bonds were unrated by any bond rating agency. Their issuer, GWG Holdings, stated in prospectuses that: “Investing in our L Bonds may be considered speculative and involves a high degree of risk, including the risk of losing your entire investment.” This has largely proven the case, as some 26,000 bondholders were largely left with nothing since the company entered bankruptcy.
An L bond, issued by GWG Holdings, financed the purchase of life insurance policies on the secondary market. GWG Holdings sold L Bonds from 2012 until 2021. However, in 2022, GWG filed a chapter 11 petition for bankruptcy to address more than $2 billion of liabilities.
