what does puttable upon death of holder mean

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13-10-2024

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What Does "Puttable Upon Death of Holder" Mean?

The phrase "puttable upon death of the holder" often appears in financial instruments like bonds, insurance policies, and investment contracts. This phrase implies a special provision that grants the beneficiary of the instrument the right to sell it back to the issuer upon the death of the original holder. Let's delve deeper into this concept, exploring its implications and practical examples.

Understanding the Concept:

Imagine you're a senior citizen who owns a bond with a clause stating it's "puttable upon death of the holder." This means your beneficiary, for example, your child, can choose to sell the bond back to the original issuer at a predetermined price upon your death. This clause offers the beneficiary flexibility and security, particularly when:

• Uncertainty about Future Value: The beneficiary might not be comfortable holding the bond, fearing its future value might fluctuate. The put option guarantees a specific price, eliminating potential market risks.
• Lack of Expertise: The beneficiary may not have the financial knowledge or experience to manage the bond effectively. The put option allows them to exit the investment without significant hassle.
• Estate Planning: The beneficiary can receive a lump-sum payment from the issuer upon the death of the original holder, simplifying estate administration and avoiding potential complications.

Benefits and Drawbacks:

Benefits:

• Guaranteed Return: The put option offers a predetermined price, guaranteeing the beneficiary a certain level of return, regardless of the market conditions.
• Risk Mitigation: It allows the beneficiary to avoid potential market fluctuations and minimize investment risks.
• Estate Planning Flexibility: It offers a predictable cash flow for the estate, facilitating a smooth transition.

Drawbacks:

• Potential for Loss: The put option may offer a lower price than the market value of the bond at the time of the holder's death.
• Limited Market Value: The beneficiary is obligated to sell the bond back to the issuer, limiting their ability to gain from potential future appreciation.
• Limited Flexibility: The beneficiary doesn't have the option to keep the bond and potentially benefit from its future growth.

Practical Examples:

• Life Insurance Policies: Some life insurance policies include "puttable upon death" clauses. The beneficiary can choose to surrender the policy for a cash value upon the death of the insured.
• Real Estate Investment Trusts (REITs): Some REITs offer "puttable upon death" options. The beneficiary can choose to sell the shares back to the REIT at a pre-determined price.

Considerations:

• Put Option Price: The put price is usually specified in the contract and might be fixed or based on a formula.
• Duration of the Option: The option might expire after a certain period or upon the occurrence of a specific event.
• Taxes and Fees: There may be taxes and fees associated with exercising the put option.

Conclusion:

The "puttable upon death of the holder" clause is a valuable provision that offers beneficiaries security and flexibility. However, it's crucial to carefully consider the implications, including potential downsides, before making investment decisions. Understanding the terms of the contract, the put option price, and the duration of the option is essential for informed decision-making.

Disclaimer: This article is intended for general informational purposes only and does not constitute financial advice. Always consult with a qualified financial advisor before making any investment decisions.