What it means
GWG Holdings bought existing life insurance policies from their owners for more than the policies could be cashed in for, then paid the premiums until the insured person died and the benefit was paid. It raised money for this by selling L Bonds to investors.
The idea was that the benefit payments would be enough to repay investors and leave a profit for the company. L Bonds had fixed terms, typically running from a couple of years up to several years.
Investors received a fixed rate of interest, and the bonds usually renewed automatically at maturity unless the holder asked for the money back. They were illiquid, meaning there was no active market to sell them before maturity.
The main attraction was a higher interest rate than many traditional bonds. The trade-off was that the bonds were unrated, which means no independent credit agency had assessed the issuer's ability to repay.
Investors had to rely on the company's own disclosures and the performance of its policy portfolio. The key risks were the timing of insurance payouts, the cost of premiums and the strength of the issuer itself.
If people live longer than expected, premiums keep being paid for longer and the return falls. The issuer later filed for bankruptcy protection, and many holders faced losses, which is a clear reminder that a high yield often signals high risk.
For a finance professional, the L Bond is a useful case for explaining product risk. It shows why you should understand what backs a bond, who stands behind it and how easily you can exit before maturity.
Investors comparing products like this should ask a few plain questions. Who is the issuer, what assets stand behind the bond, how long is the money tied up, and what happens if the company cannot pay?
If the answers are unclear, or the sales material focuses only on the interest rate, that is a signal to slow down and ask for independent advice.
In practice
Real-world examples.
Example
A retired teacher is offered an unrated bond paying a rate well above a bank deposit. Before buying, her adviser asks what backs the bond and what happens if the issuer cannot pay, and she decides to limit the investment to a small share of her savings.
Example
A small business owner has $50,000 of spare cash and considers a five-year, fixed-rate bond. He notes that he cannot sell it early, so he keeps enough cash in the bank to cover his short-term needs.
Example
A wealth manager reviews a client's portfolio and finds that 30% is in a single unrated issuer. She recommends spreading the money across several issuers and rated bonds to reduce concentration risk.
Formula
Calculation
Annual interest = principal x annual interest rate
Total interest over the term = annual interest x number of years
Worked example: an investor buys $25,000 of bonds with a fixed rate of 6% for five years.
Step 1: Annual interest = 25,000 x 0.06 = $1,500.
Step 2: Total interest over five years = 1,500 x 5 = $7,500.
Step 3: Total received if repaid in full = 25,000 + 7,500 = $32,500.
This outcome depends on the issuer paying every instalment and returning the principal. If the issuer fails, the investor could receive far less than $32,500, and even part of the original $25,000 could be lost.Case study
Seen in the real world.
Meridian Life Capital is a fictional company that buys life insurance policies and funds itself by selling unrated bonds to the public. Its marketing brochure highlighted a fixed rate of 7% and the security of insurance-backed assets.
An independent investor, Ravi, studied the filings and found that the company's premium payments were growing faster than its cash inflows. He also saw that the bonds could not be sold on any exchange.
In this illustrative story, Ravi invested only a small amount and kept the rest of his savings in rated and diversified assets. When the company later reported trouble, his loss was limited, and he credited the discipline of asking what stood behind the yield.
Watch out
Common mistakes.
- Assuming that insurance-backed means safe, when the return depends on payout timing and the strength of the issuer.
- Ignoring that an unrated bond has not been assessed by an independent credit agency.
- Putting too much money into one illiquid product, which leaves you unable to access cash when you need it.
Questions
People also ask.
Who issued L Bonds?
They were issued by GWG Holdings, a company that invested in life insurance policies bought on the secondary market.
Were L Bonds easy to sell?
No. They were generally illiquid, and holders usually had to wait until maturity to get their money back.
Why did L Bonds pay a high rate?
The higher interest reflected the higher risk, including the lack of a credit rating and the uncertainty of insurance payout timing.
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