The Death Put

Answer 1

One option you might want to look for when investing in fixed income assets such as bonds or CDs is the death put, sometimes referred to as a Survivor’s option. Although increasingly rare, a death put offers some downside protection in the event you lose value. The only drawback is that you have to die to reap the benefits of it. In essence, the death put is like life insurance on the value of the asset.

If your fixed income or debt instrument has a death put it can allow for your estate to "put back" or redeem the asset without being charged a penalty. This can be helpful in the case of CDs which often charge a penalty for early withdrawal. Bonds that carry a death put will usually redeem for par value when the estate exercises the death put. Because of the unique benefits of assets carrying a death put they are often held in portfolios for estate planning purposes.

Because underwriters must take the risk of investor mortality into account, assets that carry a death put are more complex and expensive to issue. They can also be harder to price, and may cost a little more than comparable assets that have no death benefit feature. A death put may be used to attract investors who might otherwise go for assets bearing higher coupons.

At one time the U.S. government offered bonds called flower bonds that featured a death put. These bonds were redeemable at par value upon the death of the registered holder regardless of the underlying cost basis. The explicit purpose of the survivor’s option on these bonds was to help defray estate taxes. These flower bonds are no longer available but if you look hard enough you can still find some bonds and CDs out there that offer this potentially valuable feature.