Don't invest in 'death bonds', warns regulatorFSA warns against traded life policy investments

30 November 2011

Bridge in America

The Financial Services Authority (FSA) is warning investors to avoid so-called 'death bonds', which bet on when a particular set of US citizens will die

The Financial Services Authority (FSA) is warning investors not to put their money into high-risk toxic traded life policy investments (TLPIs), known as 'death bonds'.

How do 'death bonds' work?

When you take out a life insurance policy on your own life, it is sometimes possible to sell that policy on the open market. The person who buys the policy will receive a payout when you die.

Traded life policy investments work by pooling investors' money in a fund which in turn invests in second-hand life insurance policies, often in America. Rather than paying the deceased's estate when they die, the insurer pays the proceeds to investors in the fund.

In essence, a TLPI investor is betting on when a particular set of US citizens will die.

What's the problem with TLPIs?

The FSA has found significant problems with the way in which TLPIs are designed, marketed and sold to UK retail investors:

  • If the people covered by the insurance policy live longer than expected then the investment may not function as expected.
  • Investors may have no recourse to the Financial Services Compensation Scheme (FSCS) and as many TLPIs are located offshore, outside the scope of the UK authorities.
  • If the underlying assets of the TLPI are based offshore there is also an exchange rate risk, both in terms of the costs of meeting ongoing premiums and the final payout for the underlying insurance contracts.
  • The FSA has found that some TLPIs lack sufficient liquidity to meet ongoing costs if the people whose life policies they've bought live longer than expected.
  • The product structure is complex and opaque, involving several firms working together, often in different jurisdictions.
  • If the TLPI provider needs to sell assets to raise funds, they may find it difficult to sell the underlying policies at a reasonable price due to the small market and its specialised nature. This may lead to losses for investors.

FSA plans to ban toxic 'death bonds'

Margaret Cole, FSA managing director, said: 'TLPIs are toxic products which pose significant risks for retail investors. The failure of these products in the past has led to significant consumer detriment and we fear new investors will suffer unless we take the necessary steps now to prevent their sale and distribution.

'We are issuing a strong warning to the industry not to market these products to UK retail investors. Ultimately we aim to ban TLPIs from being marketed to UK retail investors, and we intend to consult on this next year to help erase the risks they pose. Firms should not be selling these high risk products to retail investors.'

'For now, we want to make our message about these products clear – they are completely unsuitable for most UK retail investors.'

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