Red alert over supposedly 'safe' policies

Investments involving the sale of life insurance were marketed as low risk. But unwary people have suffered, as Maryrose Fison reports

Consumers are being warned to give investment products known as traded life policies (TLPs) a wide berth as a major UK watchdog and finance experts say they carry major risks.

The products first came to the fore in the US and have been marketed as ultra-safe investments to thousands of British savers and investors over the past few years. The trade involves the sale of unmatured life insurance policies to a third party investment company; the policyholders received a larger lump sum settlement than would have been possible had they surrendered it to the original insurer.

Investors on the other side stood to benefit when the policyholder died, because the death benefit payout would be (in theory) greater than the lump sum they paid to the policyholder. Investment companies recognised a gap in the market and began pooling policies together in funds which advertised attractive annual returns with little risk.

But problems are emerging with the accuracy of the underpinning life-expectancy assumptions. Estimating how long policyholders will live after they have sold their policy to an investment company has been notoriously difficult. Advances in science and medicine have meant well-intentioned longevity calculations have proved inaccurate, while some companies have been suspected of manipulating medical assessments to give unrealistically short life expectancies.

Two sets of exclusive figures given to The Independent on Sunday by the Investment Management Association (IMA) and the Financial Ombudsman Service underline some of the risks of investing in TLPs. The mis-selling of these funds has caused more than £250m in compensation to be paid to consumers to date, with 55 per cent of complaints about the sale of TLPs being upheld by the ombudsman.

"The need for fund managers to pay some £250m compensation to investors is a graphic illustration of the risks that investors in these products run. They certainly should not be promoted to the public as low-risk investments," the IMA said:

But that is what is happening, according to Andy Gadd, the head of research at financial services firm Lighthouse.

"They have become popular in the UK because, in a low-growth low-interest rate environment, the projected returns appear to be attractive," said Mr Gadd. "But the significant losses which can occur when the life expectancy figures are miscalculated are not spelled out enough."

Mr Gadd added that the TLP market "is getting bigger every year" and has now gravitated towards senior life settlements where life-expectancy projections are sometimes perceived as being more accurate. However, he said, this is no guarantee that investors in such products won't be stung. "The accuracy of forecasting the expected life span of senior life settlements is still open to what may ultimately turn out to be significant error."

Further evidence of the problem came to light last month when the Financial Services Authority (FSA) floated the idea of reclassifying the products as "generally unsuitable for the mainstream retail market". But Jason Witcombe, a financial planner at advisory firm Evolve, said the watchdog needs to go a step further as the products continue to be sold to consumers, many of them elderly, ill-placed to handle losses that can occur.

"Put crudely, people do not always die when an actuary expects them to," said Mr Witcombe. "Unless the manager of the fund holds a lot in cash, this can lead to real problems for investors when trying to redeem holdings with delays of many months.

"The popularity of lots of niche investments is down to clever marketing. Particularly when savings accounts are paying such low rates, lots of investments try to sell us the idea that risk and reward don't go hand in hand, that high returns can be achieved with little risk. But this is clearly untrue. Risk and reward are inextricably linked and you shouldn't believe anyone who tries to tell you otherwise."

While some providers of TLP do generate attractive returns, TLPs are a high-risk investment not to be considered by anyone without a sophisticated understanding of the ins and outs of the product.

As for advisers, they may not be capable of shifting the investment winners from the potential losers, said Martin Bamford, a director of IFS firm Informed Choices. "Investors need to be extremely careful before exposing their money to traded life policies," he said. "This is still a relatively new asset class for UK investors, and independent financial advisers may not have the knowledge, experience or resources to conduct sufficient due diligence before making a recommendation."

Paul Duckworth, a chartered financial planner in Grimsby, said the combination of high and consistent returns with minimal risk should always ring alarm bells for prospective investors. "If it looks too good to be true, it probably is."

Expert View

Louise Oliver, Taylor Oliver

"Traded life policy investments are complex with a number of risks attached. For starters, returns are based on an accurate estimation of life expectancy. Medical advances can, and do, prolong life and undermine these longevity assumptions."

Suggested Topics
John Travolta is a qualified airline captain and employed the pilot with his company, Alto
people'That was the lowest I’d ever felt'
Life and Style
healthIt isn’t greasy. It doesn’t smell. And moreover, it costs nothing

Other places that have held independence referendums
Arts and Entertainment
Pharrell dismissed the controversy surrounding
musicThe singer said 'the last thing I want to do is degrade'
Have you tried new the Independent Digital Edition apps?

Arts and Entertainment
Blossoming love: Colin Firth as Stanley and Emma Stone as Sophie, in 'Magic in the Moonlight'

Actors star in Woody Allen's 'Magic in the Moonlight'

A male driver reverses his Vauxhall Astra from a tow truck
newsThe 'extremely dangerous' attempt to avoid being impounded has been heavily criticised
peopleThe Times of India said actress should treat it as a 'compliment'
Arts and Entertainment
Jack Huston is the new Ben-Hur

It scooped up an unprecedented 11 Academy Awards when it was first remade in 1959


Watch this commuter wage a one-man war against the Circle Line
Home body: Badger stays safe indoors
lifeShould we feel guilty about keeping cats inside?
Life and Style

Olympic diver has made his modelling debut for Adidas

Arts and Entertainment
Maxine Peake plays Hamlet at Manchester's Royal Exchange
theatreReview: Maxine Peake brings emotional ferocity to Shakespeare's starring part

...and the perfect time to visit them

Jonas Gutierrez (r) competes with Yaya Toure (l)

Newcastle winger reveals he has testicular cancer - and is losing his trademark long hair as a result

Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Trainee Recruitment Consultant Birmingham

    £18000 - £23000 per annum + Comission: SThree: The SThree group is a world lea...

    Trainee Recruitment Consultant - Birmingham - Real Staffing

    £18000 - £23000 per annum + Commission: SThree: Real Staffing are currently lo...

    Recruitment Consultant - Soho - IT, Pharma, Public Sector

    £20000 - £25000 per annum + OTE £35,000 first year: SThree: The SThree group i...

    Sales Executive

    £20 - 24k (Uncapped Commission - £35k Year 1 OTE): Guru Careers: We are seekin...

    Day In a Page

    Mystery of the Ground Zero wedding photo

    A shot in the dark

    Mystery of the wedding photo from Ground Zero
    His life, the universe and everything

    His life, the universe and everything

    New biography sheds light on comic genius of Douglas Adams
    Save us from small screen superheroes

    Save us from small screen superheroes

    Shows like Agents of S.H.I.E.L.D are little more than marketing tools
    Reach for the skies

    Reach for the skies

    From pools to football pitches, rooftop living is looking up
    These are the 12 best hotel spas in the UK

    12 best hotel spas in the UK

    Some hotels go all out on facilities; others stand out for the sheer quality of treatments
    These Iranian-controlled Shia militias used to specialise in killing American soldiers. Now they are fighting Isis, backed up by US airstrikes

    Widespread fear of Isis is producing strange bedfellows

    Iranian-controlled Shia militias that used to kill American soldiers are now fighting Isis, helped by US airstrikes
    Topshop goes part Athena poster, part last spring Prada

    Topshop goes part Athena poster, part last spring Prada

    Shoppers don't come to Topshop for the unique
    How to make a Lego masterpiece

    How to make a Lego masterpiece

    Toy breaks out of the nursery and heads for the gallery
    Meet the ‘Endies’ – city dwellers who are too poor to have fun

    Meet the ‘Endies’ – city dwellers who are too poor to have fun

    Urbanites are cursed with an acronym pointing to Employed but No Disposable Income or Savings
    Paisley’s decision to make peace with IRA enemies might remind the Arabs of Sadat

    Ian Paisley’s decision to make peace with his IRA enemies

    His Save Ulster from Sodomy campaign would surely have been supported by many a Sunni imam
    'She was a singer, a superstar, an addict, but to me, her mother, she is simply Amy'

    'She was a singer, a superstar, an addict, but to me, her mother, she is simply Amy'

    Exclusive extract from Janis Winehouse's poignant new memoir
    Is this the role to win Cumberbatch an Oscar?

    Is this the role to win Cumberbatch an Oscar?

    The Imitation Game, film review
    England and Roy Hodgson take a joint step towards redemption in Basel

    England and Hodgson take a joint step towards redemption

    Welbeck double puts England on the road to Euro 2016
    Relatives fight over Vivian Maier’s rare photos

    Relatives fight over Vivian Maier’s rare photos

    Pictures removed from public view as courts decide ownership
    ‘Fashion has to be fun. It’s a big business, not a cure for cancer’

    ‘Fashion has to be fun. It’s a big business, not a cure for cancer’

    Donatella Versace at New York Fashion Week