Death to ‘death bonds’

Article posted: 09 May 2012

The Financial Services Authority (FSA) has put an effective stop to sales of traded life policy investments.

Traded life policy investments (TLPIs), which the press prefers to label ‘death bonds’, are pooled investments in US life assurance policies that have been sold by their original owners. The theory is that the original policyholder receives more than the surrender value and the TLPI makes returns for investors by continuing to pay the policy premiums and then collecting the death benefits.

It may sound a rather esoteric gamble on transatlantic mortality, but according to the FSA the TLPI market is worth £1 billion in the UK. It is also a market in trouble: the FSA estimates that ‘over half’ of TLPIs are ‘in financial difficulty’.  Typically the problems stem from issues surrounding the valuation of policies or the lives insured dying later than expected. Sorting matters out is complicated by the fact that many TLPI operators are offshore and thus not covered by UK compensation rules.

The FSA has now said that it plans to consult on a ban of all marketing of TLPIs to the general investing public. In the interim the regulator has issued a statement that makes it crystal clear that TLPIs ‘are unsuitable for the vast majority of retail clients’.


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