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Viatical vision

Traded life policies are an established market in the US and are gaining popularity in the UK.

IFAs have been able to access the viatical or traded life market in the UK for almost two years but take-up has been restricted by the types of funds available.

There are now a number of product providers targeting UK IFAs, both onshore and offshore.

For those not familiar with the product, the primary benefit of traded life policies is the actuarial prediction of returns in the region of 9 to 10 per cent with no exposure to equities. Actual returns can be up to 12 per cent but, as the market develops, likely returns could reduce slightly.

TLPs are gaining popularity in portfolio planning, especially as an alternative to traditional fixed-interest investments.

Equally, the attractive returns lead some advisers to consider them as an equity alternative for market-shy clients.

For funds with a full listing and approval under Section 841 of the United Kingdom Income and Corporation Taxes Act, the Inland Revenue will allow TLPs to be used in Sipps and SSASs. TLPs conceptually are not dissimilar to Teps, in as much as it is a secondary market but for life insurance rather than with-profits endowments.

TLPs involve the purchase of a life insurance policy from someone who is terminally ill and wants access to their insurance benefit before death rather than it being left to their estate.

The reasons for this can be as diverse as funding the often prohibitively expensive medical costs to just enjoying the money.

Like the secondary Tep market in the UK, policyholders get significantly more by selling the policy than surrendering.
What is worse is that often many just lapse as policyholders are unaware of their options and receive no payout at all as they struggle to pay the premiums.

In the US, traded life investment is one of the fastest-growing personal and institutional asset classes, up from $1m in 1989 to over $2bn now. With an estimated $500bn of available life insurance policies, ranging from whole of life to keyperson, the market has significant room to grow.
In the US, selling a life contract is tax-efficient, with sellers protected by legislation. Therefore, life insurance is often bought to fulfil a similar purpose to PHI or critical-illness cover in the UK.

Market-makers, with over 50 in the sector, have to get three quotes for the policy, with two from competitors, so the seller is guaranteed a good price. As the market grows, we predict that returns to sellers will increase and margins will be squeezed but it is too early to predict at what level the balance will be reached between investor and seller returns and the appropriate margin for the industry.

The individual or corporate gets a guaranteed eventual return although annualised returns on single policies can vary as they are dependent on the death of the insured which, although this can be assessed, is liable to a margin of error. This unpredictability means that most TLPs are sold within a fund structure where mortality becomes less significant.

In order to ensure the highest accuracy, most fund managers do not just take a random selection. The accuracy of the data further improves as the future life expec-tancy increases. Very short-term prognoses can be less accurate as the patient may react differently to medication, with the life assured living longer. This may seem morbid but the life insurance industry has been making the same predictions for over a century and, without the secondary market, the life assured would have no access to their investment.

The classes of fund available will differ by fund managers but there are now three basic types of fund available. Most providers also offer hedging for clients who are offshore.
The standard growth fund buys policies and takes the actuarial and actual payouts. Guaranteed classes are underwritten by a third party.

The upside is a guaranteed annual return within a period after the anticipated maturity date, normally 12 months. The downside is that the fund sacrifices returns in order to pay for the underwriting.

A new variant is the income class, which provides returns of around 6 per cent annually, but here the investor sacrifices gross return for the privilege of a regular income.

We anticipate that the TLP market will be in the region of 500m within a few years, with the potential to be an established asset class for all types of investors by the end of this decade.


Single minded

Depolarisation has been a long time coming. Almost since the Financial Services Act depolarised financial advisers into the independent and tied camps, calls were made for a more flexible reg-ime. But it was not until the Office of Fair Trading published its paper in August 1999 that depolarisation gained a head of steam.


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