What Was an L Bond?

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 financial services firm GWG Holdings, which ceased selling them on April 16, 2021.1

How L Bonds Worked

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.

An L bond sought to provide a high yield for the bondholder in exchange for bearing the risk that insurance policy premiums or benefits may not be paid.

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.

GWG Holdings and the L Bond

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 specializes in alternative assets.2

The company purchased life insurance contracts from seniors at a discount to their benefit value. In a viatical settlement, the company may pay a senior $250,000 for their $1 million life insurance policy and take over premium payments of $30,000 a year.

When the senior dies, 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, roughly half (46%)—$882 million—was in policies covering people 85 and older.3

GWG failed to file its annual report for the year ending Dec. 31, 2020, and a Form 10-Q for the quarter ending March 31, 2021. After failing to timely file its 2020 annual report, GWG suspended its offering of L Bonds. Further, several members of the Board of Directors reportedly resigned in the second quarter of 2021.4

GWG Holdings sold L Bonds from 2012 until 2021. In 2022, GWG filed a chapter 11 petition for bankruptcy to address more than $2 billion of liabilities after accounting issues and an auditor resignation disrupted its business.5

Characteristics of the L Bond

• The bonds were sold in denominations of $1,000 and the minimum investment value for any one investor was $25,000.6
• The bonds could be purchased either directly from GWG Holdings or a Depository Trust Company (DTC) participant.
• An L bondholder had the same interest rate for the entirety of the bond term. If GWG changed its interest rate for the bond, the investor would have the new rate applied to their bond if they choose to renew the bond upon maturity.
• When the L bond matured, it was automatically renewed to a similar offering unless it was elected to be redeemed by the investor or the issuer.
• The bonds were callable. The firm reserved the right to call and redeem any or all of the L bonds at any time without penalty.
• Bondholders couldn't redeem the bond before maturity unless in the event of death, insolvency, or disability. For reasons other than the dire circumstances mentioned above, if GWG agreed to redeem a bond, a 6% penalty fee would be applied and subtracted from the amount redeemed.6
• L bonds were illiquid investments: There was no secondary public market for these offerings. Therefore, the ability to resell these bonds was highly unlikely. The illiquid characteristic of L bonds meant that if the bond performed poorly, the bondholder still had to hold onto it until maturity or pay a 6% redemption fee to sell it.
• L bonds were not correlated to the market. Therefore, the volatility of the financial market typically did not affect the value of the bond.
• In the event of default, claims for payment among the holders of L bonds and other secured debt holders would be treated equally and without preference.7

Also, the interest payments on the bonds were linked to the payout if the life insurance policies are purchased in the secondary market. If the insured party lived past their life expectancy, or the insurance company that holds the policy becomes bankrupt, the value of GWG's portfolio could drop, leading to a situation in which GWG Holdings might be unable to make its interest payments to its L bondholders.

The Bottom Line

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.