Would you go near a death bond?

Plans to ban traded life policy (TLP) investments may have consigned the products to the investment bin – but advocates say they offer benefits like no other asset class.

Toxic, dangerous, damaging and high risk – just some of the words used, including by the FSA, to describe traded life policy investments, or so-called ‘death bonds’.

We may soon be able to add the following: banned

The FSA may be delivered a death sentence of its very own to TLPs in November when it outlined plans to ban their sale and promotion. It even likened some policies to ‘ponzi’ schemes.

Citing evidence of poor design and marketing, it said TLPs are unsuitable for most retail investors.

A series of high-profile failures – most notably Keydata – have damaged the asset class. In addition to concerns over investment suitability, TLPs also touch a moral nerve – investors are effectively betting and, later, cashing-in on people’s deaths.

But those who promote and use the products deny they are “toxic” and point to what they see as marked benefits: they are liquid, uncorrelated to equity markets and perfect for diversification.

Janet Comrie, adviser and director at Gold Alliance, said regulatory warnings will not stop her using the investments.

“I think there is absolutely a place for them and I will continue to hold and promote them in the future,” she said. “They are a completely different asset class to anything else because they are not reliant on investment performance.”

Comrie pointed out there are “huge differences” between various types of TLPs, drawing a distinction between traded endowment policies with terminal bonuses built into their projections and traded whole of life policies, which are reliant on people dying and carry no investment element.

“The TLP we hold is dependent upon policyholders dying and I would defend that advice to the hilt and continue to monitor what is happening.”

Comrie said if the FSA does ban the investments she will likely write a letter to her local MP voicing her disapproval.

Hasley Investment Management founding partner Roderick Collins runs several multi-manager funds holding the EEA Life Settlement fund, one of the largest Traded Life Policy funds.

He said it offers distinct benefits.

“It is self-liquidating – people are dying all the time so policies are maturing all the time. Any suggestion it is an illiquid investment is nonsense. It is absolutely not a ponzi scheme as the FSA implies.”

He added the investments are also an excellent diversifier because they have no correlation with equity markets.

Collins said the idea TLPs pose longevity risks from people living longer than expected is a red herring.

“These poor souls are going to die. The chances of miracle cures being found for all the illnesses in the portfolio are minimal.”

Collins’ remarks hint at another charge levelled against TLP providers - that the investments are morally questionable. But Collins said that, rather than profiteering from death, TLPs offer welcome aid to individuals in the later chapters of their lives.

“Some people say it is sick to buy these policies, but I disagree – you get a much better price in the open market than if you surrender back to the life company and the assured may want some money for medical expenses, a final holiday or funeral.”