The truth about traded life interests

THE US traded life interest (TLI) market is worth looking into. Some of the UK’s top fund managers are now taking this investment medium very seriously. We at Blacktower Financial Management have been reviewing the market for some time and still consider that there are important points to bear in mind.

The TLI market is relatively new to the UK and Europe. As with any emerging market, there may be some uncertainty as to what it entails and how it works.

What is a TLI?

A TLI, or ‘life settlement’, is the sale of a life insurance policy to a third party, where the owner relinquishes all legal rights to the policy. In these transactions, the TLI investor becomes the new owner and/or beneficiary of the life insurance policy and is responsible for paying all future premium payments, and collecting the entire death benefit of the policy, upon the death of the insured.

The TLI market has been compared to the UK traded endowment policy (TEP) market, but, while they are both life-policy related, the key differences are that a TLI is a life insurance policy with little investment element, whereas a TEP is a with-profits investment, with an element of life insurance to it.

In addition, while a TEP’s performance is reliant upon the performance of the with-profits fund, a TLI’s performance is purely dependent upon the death of the life insured. TLI returns are not affected by fluctuations in interest rates, stock markets or oil prices.

As a result, TLIs may be ideal for decreasing a portfolio’s systematic risk and for risk-averse investors seeking a safe haven. A low-cost structure, combined with normal mortality experience, offers the prospect of returns in the region of eight per cent and 11 per cent net returns per annum.

TLIs -v- viaticals

Viatical policies have hit the headlines, partly due to legal action against Mutual Benefits Corp (MBC), a provider of such policies. Many readers here in the Algarve will recall a very aggressive advertising campaign that promised high level return for no risk. This scheme, promoted by the now discredited MBC, has left investors with a loss of capital and little chance of compensation. While TLIs are similar to viatical policies, they are not the same.

As an investment, viaticals are structurally more risky as they insure the life of a person of any age who has a life expectancy of less than two years. It merely takes advances in medical technology, or a strong will to live, to completely invalidate the basis upon which the viatical was purchased. With TLIs, the life assured is of such an advanced age that the asset is purchased based upon the assured dying at around the actuarially expected date.

Additionally, some TLIs mature automatically when the life assured reaches 100 years of age, a characteristic that acts as a built-in ‘stop-loss’.

A lesson to be learnt from the MBC episode is to deal with established and experienced companies who have a track record of pioneering secure-growth investment vehicles in emerging markets, maintaining and enforcing high standards and controls, and are correctly regulated in their activities.

Without the correct level of control, it is easy to pay too much for policies, which can turn a good investment into a bad one.

In addition, to invest in the TLI market in a lower risk manner, Blacktower Financial Management makes the following general recommendations:

•Only invest in TLIs (life settlements) and not viaticals

•The life assured should be of an advanced age (usually over 75) and with an average life expectancy

•Only invest in TLIs under-written by life companies whose S&P rating and/or AM Best credit rating is at least ‘A’

•The TLI should have been in force for more than two years

•Preferably purchase shares in a fund to gain exposure to a fully diversified portfolio of TLIs

•Investing in TLIs is a medium to long-term investment, so a time horizon of a minimum of seven years should be expected

Therefore, if this asset class appeals to you, we would recommend that you invest only via the medium of a correctly regulated fund, such as those offered by Surrendalink UK. In this way, your purchase costs are reduced, owing to the economics of scale, and you can be sure that your capital is securely invested in a regulated and transparent fund, with specialist managers taking responsibility for delivering investment return.

It is interesting to note that the investment banks and better fund managers will only buy this type of investment in this way. We at Blacktower Financial Management will not purchase an investment on behalf of a client, unless it is through an authorised and regulated collective investment fund.

Contributed by

JOHN WESTWOOD

Managing Director

Blacktower Financial

Management Limited

• John Westwood can be contacted by telephone on 289 417 267 or via email at john.westwood@blacktowerfm.com