L Bonds - betting on death

2012 - 2021

L Bonds were invented by GWG Holdings Inc, of Dallas, TX. These were bonds backed by the cash flow value of life insurance policies. People in need of money sold their life insurance policies to GWG for immediate cash. The policies were then bundled into bonds and sold to investors who continued to pay for the insurance. If the insured person died the investor received the insurance payout. Great concept - right?

Bonds that repay from life insurance policy payouts can work when the portfolio is large. This is how large insurance companies stay in business. However, a small portfolio may not look like the average. If the age of death is much later than the statistical average, the policy will have to continue to pay the insured until death and bondholders will receive less money from payouts than expected.

Essentially, the investors made a bet that they knew more about the lives of policyholders than the insurance companies that did the math.

Bondholders had already paid more than the price insurance companies were willing to pay (the “cash surrender” value).

L Bond investors were repaid only after other GWG creditors in the GWG waterfall - risking insufficient cash to pay investors. GWG could also buy back the policies before the investors received any disbursement - further reducing investors' expected payouts. Or GWG could default.

All in all, there were many scenarios where L Bond investors would receive less than their expected returns. These came true on April 20, 2022. GWG Holdings, Inc. filed for Chapter 11 due to bad accounting, questionable internal controls, investor lawsuits, and an inability to resell or cash out the money in L Bonds.

As of late 2024, GWG owed $2B in liabilities, including $1.3B (65%) to L Bondholders.

References:
Overview from a specialized law firm