Death bonds, or Traded Life Policy Investments (TLPIs), are in essence a bet on when someone else will die. That’s bad enough, but now the Financial Services Authority (FSA) has branded them “toxic” and “high risk”. Here’s how they work.
Say you take out a life assurance policy for yourself. You pay regular premiums in exchange for a lump sum paid to whoever you nominate on death. But later you find you can’t afford the premiums, or you decide your existing cover (perhaps provided through work) is adequate. If you cancel the policy you may lose most of your money. One alternative is to sell your policy on the open market.
TLPIs work by pooling money in a fund that buys life insurance policies that have mainly been sold in America. Such purchases are often made from seriously ill US citizens and are bought at a hefty discount. The TLPI then takes over these policies. So rather than pay out to the original policyholder’s estate on death, insurers will pay the proceeds to the fund.
In Britain TLPIs have been sold as alternative investments, supposedly offering strong returns whatever happens on the stockmarket. Britons have invested more than £1bn in these funds. But medical advances mean that insured Americans often live longer than expected. So TLPI funds can suffer poorer returns than forecast. Many funds don’t have enough cash to meet ongoing costs if this happens. Furthermore, the market for these policies is so small that TLPI funds may find it hard to sell them at a decent price to raise money if needed.
This is all bad news for TLPI investors. Some products – such as those offered by Keydata – have already failed, inflicting millions of pounds worth of losses on UK investors. Up to half that £1bn is currently thought to be at risk. Back in February 2010 the FSA told independent financial advisers it would closely monitor sales. Now the FSA plans to ban them selling these products next year. The advice is clear: don’t be tempted to buy.
But what if you’ve already been sold one? If you feel you weren’t offered proper advice about the risks, get in touch with your adviser and start their complaints procedure. If you’re not satisfied, go to the Financial Ombudsman (0800-023 4567). A final warning: nearly all TLPI fund managers are based offshore. So investors are unlikely to be protected by the Financial Services Compensation Scheme should one of them go bust.
Category: Economics