The UK Financial Services Authority [FSA] has issued a guidance,* warning that traded life policy investments** "are high risk, toxic products that are generally unsuitable for the majority of UK retail investors, and should therefore not be promoted to them." The regulator stated that it has found that traded life policies have significant problems with the way in which they are designed, marketed and sold.
The problems specifically cited:
(1) Should the insured exceed the estimated life expectancy, the return upon investment will decline.
(2) There may not be sufficient premiums in escrow to cover the payments if the insured lives longer than estimated and expected.
(3) There may not be an active market for the investment, should the investor need to, or choose to, sell his or her interest.
(4) The company responsible for final payment upon maturity is generally based offshore, making recovery subject to possible exchange rate fluctuation. * It is generally outside the FSAs jurisdiction.
Note that a large number of institutional investors, including major German banks, and some of the world's wealthiest men, have substantial holdings in traded life policies; the FSA limited its warning to UK retail investors.
Will traded life policy investments be eventually prohibited in the UK ? we cannot say, but there are hints to that effect. We will be closely following this story.
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*Guidance - Traded Life Policy Investments
http://www.fsc.gov.uk/guidance/gc11-28.pdf
** Also known in the English-speaking world as senior life settlements and life settlements, they are investments in the secondary life insurance market. The investor becomes the owner and beneficiary
of a life insurance policy on a third party, and collects when the policy matures after the insured's death.
The problems specifically cited:
(1) Should the insured exceed the estimated life expectancy, the return upon investment will decline.
(2) There may not be sufficient premiums in escrow to cover the payments if the insured lives longer than estimated and expected.
(3) There may not be an active market for the investment, should the investor need to, or choose to, sell his or her interest.
(4) The company responsible for final payment upon maturity is generally based offshore, making recovery subject to possible exchange rate fluctuation. * It is generally outside the FSAs jurisdiction.
Note that a large number of institutional investors, including major German banks, and some of the world's wealthiest men, have substantial holdings in traded life policies; the FSA limited its warning to UK retail investors.
Will traded life policy investments be eventually prohibited in the UK ? we cannot say, but there are hints to that effect. We will be closely following this story.
_________________________________________________________________________
*Guidance - Traded Life Policy Investments
http://www.fsc.gov.uk/guidance/gc11-28.pdf
** Also known in the English-speaking world as senior life settlements and life settlements, they are investments in the secondary life insurance market. The investor becomes the owner and beneficiary
of a life insurance policy on a third party, and collects when the policy matures after the insured's death.
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