The Financial Services Authority (FSA) has issued guidance warning about the risks of traded life policy investments.
These investments, which are often referred to as ‘death bonds’, have been described by the FSA as “high risk, toxic products that are generally unsuitable for the majority of UK retail investors”.
As a result of this new guidance, death bonds should no longer be promoted to retail investors in the UK.
Traded life policy investments (TLPIs) involve investors pooling their money to buy US life insurance policies.
The investment return comes from the death of the sum assured paid by the policy on the death of the lives assured, which makes an accurate prediction of life expectancy very important to determine the likely return.
The strongly worded warning issued by the FSA today is likely to be followed by an absolute ban of death bond sales next year.
Highlighting the key risks of investing in TLPIs, the FSA points to the often complex and opaque product structure used. This can often involve several parties in different jurisdictions, with unclear roles and responsibilities.
When it comes to investing, you should only ever invest in assets you fully understand.
Some of the highest profile investment failures in recent years have been the result of highly complex investment products with multiple parties involved in their manufacture, fund management and promotion.
The FSA has also pointed out that investors may have limited recourse to the Financial Services Compensation Scheme (FSCS), as TLPI managers tend to be located overseas.
We are pleased to see the FSA taking this proactive stance on death bonds for retail investors.
Whilst there are undoubtedly one or two reputable operators in this asset class, it is an investment type best left to institutional investors who can better quantify and manage the various risks of things going badly wrong.
Any investor who has been advised to include death bonds within their own portfolios should urgently seek advice on the ongoing suitability of these investments.
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