How to avoid being burned by traded life policies

In light of the unravelling Keydata scandal, how do life settlements work and what are the risks of this asset class?

The theory of smooth, steady returns decoupled from stock markets should make life settlements, or traded life policies, a perfect part of any portfolio but if that is the case why have so many investors seemingly been burned?

The slightly ghoulish asset class which depends on people dying to generate profits for investors has struggled for respectability in recent years after being linked to a succession of scandals starting with Shepherds Select, touching Arch Cru and culminating in Keydata Investment Services.

The European Life Settlement Association (ELSA) hopes a conference in London this week will be the cue to clean up the sector’s image. It has invited Peter Smith, head of investment policy at the Financial Services Authority, to be keynote speaker.

This could be a sign of confidence or bravery given that Smith is expected to issue a challenge to providers over their promotion and design of funds investing in TLPs.

The conference comes soon after the American Council of Life Insurers shook the sector with a call for the securitisation of life settlements to be banned. It argues that securitisation will lead the market to over heat and could encourage further fraud.

Gough calls time on the asset class

The proposed clampdown from the ACLI was the final straw for adviser Richard Gough (pictured above) of Castle Court Consulting in Cardiff. Gough used to favour traded life policies as diversification tool. ‘As an idea it is great…but we will look to eliminate our exposure over the next 18 months,’ he said.

‘I argued at the time it was a low-risk, low return investment but now the risk has gone up it is a no brainer,’ said Gough.

Gough’s main concern was that a life settlement fund manager selling assets would be treated as forced seller regardless of the circumstances. ‘If they can’t meet redemptions they either suspend the fund or it’s a fire sale,’ he said. ‘It works much better in a close-ended environment.’