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Moral issues behind new market

Why does the traded life policy market split IFA opinion when clients can expect relatively risk-free returns of around 12 per cent and IFAs get 4 per cent initial commission plus trail?

Traded life policies are life insurance contracts sold by terminally-ill policyholders to unlock the benefits before they die. Last year, Tep specialist Shepherds launched what is thought to be the UK&#39s first fund based on traded life policies with targeted returns of 12 per cent.

The fund buys policies from US clients because they are more highly insured than in the UK and there are a large number of policies available. Shepherds says a policy with a death benefit of $300,000 might be bought from the life assured for $200,000.

The discount is calculated using medical and actuarial data based on the age, life expectancy and medical condition of the policyholder. The longer the life expectancy, the higher the discount.

Shepherds says it has created a sophisticated claims model to determine the poss-ible overall yields from the fund.

In the US, where the TLP market turned over $2bn last year, over-65s are estimated to have $467bn of life cover, with $167bn available for sale at any one time.

One of the fund&#39s key selling points in the current market is that it is not based on unpredictable investment returns. Shepherds managing director Mike Abraham says: “With its guaranteed payout, high fixed returns and freedom from equity market volatility, the traded life policy fund will experience a rapid growth in popularity.”

Or will it? Some IFAs doubt whether British clients will be happy to accept an investment based on terminally-ill people selling their insurance at a knockdown price.

Syndaxi Financial Planning director Robert Reid says: “One of the main challenges to the market is that British clients are not very good about talking about death, unlike Americans who seem much more able to deal with it.”

Inter-Alliance Group spokesman Charles Ansdell says: “In the US, this market has attracted its fair share of controversy. Ethical issues have been a major consideration and, in particular, the aggressive and sometimes tasteless marketing that has marred viaticals in the US.”

A further concern is what might happen to returns if rapidly advancing gene therapies, for example, were to lead to new treatments, meaning the original policyholders live much longer than expected.

Abraham says: “The fund buys the policies of older people, who generally have more than one illness. Even if scientists were to discover how to treat what would normally be terminal cancer, there are many sorts of cancer and many other terminal diseases.”

According to Shepherds, leading British and international investment banks are investing heavily in the US traded life policy market as a complementary asset class.It is considered a low-risk asset class and is wholly uncorrelated to any other form of inv-estment return.

This alone could appeal to clients stung by three years of dire equity performance and global political and economic uncertainty. But there are doubts over whether advisers should be steering clients towards diversifying their portfolios in this way.

M2 Financial investment specialist Steve Buttercase says: “There are a lot of vulnerable clients out there at the moment. The funds look interesting but I will not be looking to recommend them until the market is more established and there has been more research. At times like these, IFAs may do well by sticking to their guns and not rushing into what looks like the next big thing.”

Opinion is also divided as to whether IFAs should consider advising their own terminally-ill clients to sell their life insurance policy.

Charcol wealth management director Roderic Rennison says: “This sounds like a very good idea for some clients but you would probably need an accountant and a solicitor plus the financial adviser to work with the terminally-ill person and their family. The client is very vulnerable and requires a high level of service.”

Rennison warns that advising in these circumstances is treading a very fine line.

But M2 Financial managing director Mark Howard is more pragmatic. He says: “What is wrong with allowing a terminally-ill client to get their hands on their money, which they may badly need to improve their quality of life or medical care, if you can prove this is the best course of action?”


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