Investing in death?

[CliveH]

A tad dramatic I know but I would be interested in any feedback on this. For some time there has been market for second hand endowment policies - where the policy has a value on maturity or on death of the policyholder. The benefit was often that if you had a policy that you no longer needed, you either had to make it paid up and get reduced benefits, maintain it to maturity or sell it. Depending on the type of policy selling it could be the best option and there are various auction sites available to test the water - just google it if you are interested.

 

But now things have moved to the likes of Whole of Life policies (tho not exclusively and world wide many other policy types are used as well) that were often set up to provide a guaranteed lumpsum on death whenever it occurs - in contrast endowments had a maturity date when cover ceased although some could have "Conversion Options".

 

A whole of life policy was ususally set up to mitigate IHT and many were set up before the rules changed re individual IHT zero rate bands. If you left all to your spouse on death then you used to forgo your own IHT zero rate band. So using todays IHTZRB of £325K if you had an estate of £650K then under the old rules if you had "mirror wills" then only one IHTZRB could be used and so the tax man would take £130,000 on second death. But now both IHTZRB can be used so, in general all £650K is passed to the beneficiaries with no IHT.

 

But prior to this fit of generosity - a lot of people took out Whole of Life plans to pay out to mitigate the old IHT rules and of course these plans are often not really required any more

 

So a 75 year old with such a policy in place may not need such a policy anymore, could do with saving the premiums and selling the policy could allow them to pay for anything from medical expences to Long Term Care to that World Cruise.

 

So the seller benefits as the sale price is higher than the surrender value. The buyer then maintains the premiums and takes the pay out when the policy pays out when the Life Assured dies.

 

So overall - on the face of it both parties benefit. But it has tended to be a one on one transaction.

What is happening now is that these second hand policies are being packaged up and bundled together so that investors do not have to purchase a specific policy or policies - but can place a sum of money in fund and that fund buys the policies.

 

I can include such a fund in a portfolio mix.

 

So it seems to me that this is a kind of investment in death -

 

When advising anyone we always take into account the views of the individuals - Medics for example often state that they want no investment in Tobacco companies (Shame when you consider the returns from the likes of BAT) and many prefer not to invest in arms manufacturers. All personal views are noted and taken on board and complied with as far as is humanely possible - But I am not sure why but this development into "Life Settlement Funds" leaves me rather "concerned".

 

Both parties benefit and those that sell the policy do so freely as consenting adults and I would certainly be MORE concerned if any "rule" was introduced to restrict their freedom to do what they want with their own policy. Goodness knows you only have to look at the rules and restrictions on things like Pensions to realise that those rules and restrictions put the majority off.

 

So if anyone has any views I would be interested.

[antony1969]

Clive aka Brian Kirby :-D

[Guest pelmetman]

I assume the policies only pay out if the original person dies before reaching 75? :-S...............

 

So it could start a growth in old people being bumped off 8-) 8-)

[CliveH]

antony1969 - 2012-08-28 5:26 PM

 

Clive aka Brian Kirby :-D

Now there is no need for that Anthony (lol)

[CliveH]

pelmetman - 2012-08-28 6:22 PM

 

I assume the policies only pay out if the original person dies before reaching 75? :-S...............

 

So it could start a growth in old people being bumped off 8-) 8-)

Not as far as I know Dave the Age 75 limit on pensions no longer exists anyway and you can have a Whole of Lfe, Life Cover policy to any age as long as you are insurable at the start of the policy. Intererestingly when the plans were sold to another individual - the buyer and seller never were known to each other. The sale always took place via an auction house. I always thought this was a good plot for a Murder story. So if anything having a fund purchase the plans is better still from this regard.

 

[Syd]

 

Hi Clive

As far as I am aware this has been going on for quiet some time.

As far as I am concerned it is a very interesting investment and I am makeing use of it in the same manner that you have set out.

I have bought mine through a kind of "co-op" that a few of us have banded together and set up.

[CliveH]

Very interesting Syd.

 

I am aware of some "Investment clubs" doing this. I also found it amusing that when the Newspapers and Regulator were on their bash the Endowment kick, those that "were in the know" made a tidy profit from buying up unwanted policies.

 

Don't get me wrong Endowments were missold in the later years when LAPR was scrapped and investment returns tailed off. - But many were scrapped/sold/surrenderred wrongly in my view because of the adverse publicity - baby out with the bathwater certainly. Some were very good plans indeed.

 

It was this market in second hand unwanted policies that has driven this particular market such that now rather than buy the secondhand policies direct you can simply by units in a fund that does it for you but on a massive scale.

[Brian Kirby]

A few things occur to me.

 

First, that the policies being offered for sale would appear to be likely to amount to "distress sales". That is to say, that the insured presumably now needs immediate cash, because otherwise, why sell? There would appear little to no risk (but see following points) to the buyer. Death, and the payout (subject to the detailed terms of the policy), are both inevitable: only the timing of the event remains uncertain. So, does the insured really get a fair price, or are these schemes like equity release schemes, where many have found themselves disadvantaged? So, fair in relation to surrender value, yes. But, fair in relationship to the payout to be expected? This seems to me to raise the possibility of exploitation of the living, but frail, rather than of the dead.

 

Second point. If these are being traded in a market, as opposed to between relatives or friends, what is the possibility that the seller may die, but the buyer not know of this? So, the buyer, having paid for the policy, will have to monitor the insured to know when they die, to be able to claim. If there are no surviving relatives, this may not be so easy. I assume they also need a copy of the death certificate to submit to the insurer. Do they have any actual right to this? Whatever the contractual rights of buyers, surviving relatives may not welcome their interventions at what is likely to be an emotional time, and may deeply resent the fact that he is about to trouser what they may have hoped would be their inheritance. In some cases, it seems this may give rise to legal challenges over the purchase of the policy, on grounds that it was sold under some form of duress.

 

Third point. Funds holding these policies will need to monitor the insureds as above. Since the information on who died, with what yield, will presumably only be known by, and declared by, the fund manager, but not to the public at large, how could investors verify, as they can with funds investing in shares etc, the claimed returns? Also, how could such funds be audited, and who will control the process? It seems a little open to the unscrupulous to take in investors money, buy policies at knock-down rates, realise the benefits, and not declare all the returns. Modest returns for investors, but potentially massive returns for fund managers. It seems to me one would need to investigate the credentials of the fund very carefully before investing, and should certainly not respond directly to ads in the Sunday papers! In the wrong hands, such schemes seem to me to have the potential to become something of a "Ponzi", but one where its true nature would be far more difficult to identify.

 

Final point. This type of investment seems only suitable for the relatively young and healthy, because one obvious consideration is that to be worthwhile, the buyer has to be confident they will outlive the insured. Otherwise, IMO, it merely becomes a rather tacky form of gambling.

[CliveH]

Brian Kirby - 2012-08-29 12:10 PM

 

A few things occur to me.

 

First, that the policies being offered for sale would appear to be likely to amount to "distress sales". That is to say, that the insured presumably now needs immediate cash, because otherwise, why sell? There would appear little to no risk (but see following points) to the buyer. Death, and the payout (subject to the detailed terms of the policy), are both inevitable: only the timing of the event remains uncertain. So, does the insured really get a fair price, or are these schemes like equity release schemes, where many have found themselves disadvantaged? So, fair in relation to surrender value, yes. But, fair in relationship to the payout to be expected? This seems to me to raise the possibility of exploitation of the living, but frail, rather than of the dead.

 

Not really a distress sale - many of these plans have been taken out to mitigate an IHT liability that since the change in the rules re passing your IHT ZRB to your spouse are no longer required. The options for the individual is to a) Surrender and the surrender values are whatever the unit value is on the day of surrender, b) carry on paying the premiums to give someone else a larger payout on your death, c) Make the plan paid up and give someone a smaller payout on your death or d) sell the policy.

 

The owner of the policy has a choice and has to approach the buyer - not the other way round.

 

...................................................

 

Second point. If these are being traded in a market, as opposed to between relatives or friends, what is the possibility that the seller may die, but the buyer not know of this? So, the buyer, having paid for the policy, will have to monitor the insured to know when they die, to be able to claim. If there are no surviving relatives, this may not be so easy. I assume they also need a copy of the death certificate to submit to the insurer. Do they have any actual right to this? Whatever the contractual rights of buyers, surviving relatives may not welcome their interventions at what is likely to be an emotional time, and may deeply resent the fact that he is about to trouser what they may have hoped would be their inheritance. In some cases, it seems this may give rise to legal challenges over the purchase of the policy, on grounds that it was sold under some form of duress.

 

 

Way of mark here Brian - there is no legal grounds for challenge and the third party rules for policy sale have been well tested and approved. The buyer is assigned as beneficary under the policy and is therefore notified of the plan. It is no different in prnciple to a Key man policy where a third party such as an employer can insure the life or health of a key worker. So yes they do have a right to do this. Well established in UK Law.

 

There IS a problem if a family member is due to benefit from their buying an elderly relatives policy as ownership would then go with knowledge of the Life Assured and so it would be far easier to bump off Auntie and get the pay out rather than bump off smeone unkown to you and whose identidy is protected.

 

 

 

 

 

 

 

 

 

 

Third point. Funds holding these policies will need to monitor the insureds as above. Since the information on who died, with what yield, will presumably only be known by, and declared by, the fund manager, but not to the public at large, how could investors verify, as they can with funds investing in shares etc, the claimed returns? Also, how could such funds be audited, and who will control the process? It seems a little open to the unscrupulous to take in investors money, buy policies at knock-down rates, realise the benefits, and not declare all the returns. Modest returns for investors, but potentially massive returns for fund managers. It seems to me one would need to investigate the credentials of the fund very carefully before investing, and should certainly not respond directly to ads in the Sunday papers! In the wrong hands, such schemes seem to me to have the potential to become something of a "Ponzi", but one where its true nature would be far more difficult to identify.

 

Again way of mark here Brian - the fund would publish returns as all are required to so do - the gain or loss would be a function of what the plan was bought for and what it matured at less any ongoing premium requirement. Simple. A Unit Trust is governed via UK Trust Law and an OEIC is governed by UK Contract Law.

 

 

 

 

 

 

 

 

Final point. This type of investment seems only suitable for the relatively young and healthy, because one obvious consideration is that to be worthwhile, the buyer has to be confident they will outlive the insured. Otherwise, IMO, it merely becomes a rather tacky form of gambling.

 

This is true if you are buying the policies yourself - but within a fund where you would have the economies of scale - age becomes less relevent. This is one of the points that makes such a fund of Traded Policies more attractive because of the professional management and huge number of policies smoothing out the annual returns compared with an individuals ability to gain regular returns from buying individual policies.

 

More info available on line - here is a starter

 

http://www.apmm.org/selling_faq.php

 

 

[Brian Kirby]

But, I'm still puzzled as to how the buyer is to know when the insured had died (whether bought by a fund or an individual)? The insured can't tell the insurer, and there can presumably be no obligation on relatives to notify the insurer on behalf of the buyer. So what happens? The APMM doesn't seem to explain this either.

[Guest pelmetman]

Brian Kirby - 2012-08-31 11:17 PM

 

But, I'm still puzzled as to how the buyer is to know when the insured had died (whether bought by a fund or an individual)? The insured can't tell the insurer, and there can presumably be no obligation on relatives to notify the insurer on behalf of the buyer. So what happens? The APMM doesn't seem to explain this either.

 

I expect it'll work similar to endowments Brian, I sold a endowment a while back and as part of the deal our friends were nominated to tell them if I snuff it 8-).................in return they get 500 quid :-S.......

 

 

[CliveH]

Ownership of the policy is assigned to the buyer. The Life Assured remains the same. On maturity with no death hopefuly, the assigned owner is informed in the normal way as they are now listed as the interested party. With a whole of life policy when the original owner dies the person or organisation to whome the policy is assigned to is informed as a legitimate "interested party".

 

As I say - it is very similar to Key Man Life and/or Health insurance where the interested party is usually the employer that would suffer financial/turnover loss if a key employee were to die or be unable to work.

 

A quick example Dave - if I where to invest in your business and knew that you and only you could make the pelmets that make the product range unique and therefore highly prized by Pelmet affectionardoes, then I would be well advised to insure your Life and Health so that if you sadly died or became so ill you could not work then the policy would pay out to replace the return on my investment. The policy would be on your life and so on your death or illness the provider would be informed and a claim made. But the payout would go to the owner of the policy - me - rather than you.

 

It is much the same when someone has one of these policies that for whatever reason is no longer required and so they sell the accrued and future benefits to a third party. The reporting of the "claim event" is relatively simple. The policy is still listing the original owner as the Life Assured - so whatever triggers it - all interested parties are informed when claim event takes place and so the person or organiasation to which the policy is assigned/owned by receives the sum assured.

 

The advantages for the person selling such a policy is that they get a payout to them without their having to die to recieve it.

 

If the original idea was to save 40% IHT on part of the estate but now a rule change means that this policy is no longer needed - then selling the policy can be a good option compared to letting it lapse/be paid up/continuing to pay the premiums or surrender

[Brian Kirby]

Sorry. Still don't understand. :-)

 

Your original post refers to whole of life policies, not endowments, or similar, with maturity dates. As I understand whole of life, the only event that triggers a payout is the death of the insured. Presumably this was why they were used to get around IHT? So, someone has to inform the insurer of the death, and has to furnish proof of the event, usually by sending them the death certificate, or a certified copy, before they will pay out.

 

So, how does the buyer come to know when the insured dies?

 

As I said above, the insured can't tell them, and relatives may not know of the existence of the insurance, so may not be able to do so, even if they would have no objection to so doing and, it seems to me have no interest in so doing.

 

After all, the insured may not even be in the UK at the time of their death, so how would the buyer know when to lodge their claim, how does s/he get the necessary certificate, and from whom? Or am I just missing something obvious?

[Guest pelmetman]

Brian Kirby - 2012-09-01 10:57 AM

 

Sorry. Still don't understand. :-)

 

Your original post refers to whole of life policies, not endowments, or similar, with maturity dates. As I understand whole of life, the only event that triggers a payout is the death of the insured. Presumably this was why they were used to get around IHT? So, someone has to inform the insurer of the death, and has to furnish proof of the event, usually by sending them the death certificate, or a certified copy, before they will pay out.

 

So, how does the buyer come to know when the insured dies?

 

As I said above, the insured can't tell them, and relatives may not know of the existence of the insurance, so may not be able to do so, even if they would have no objection to so doing and, it seems to me have no interest in so doing.

 

After all, the insured may not even be in the UK at the time of their death, so how would the buyer know when to lodge their claim, how does s/he get the necessary certificate, and from whom? Or am I just missing something obvious?

 

I guess the insurance company will start making inquiries once the premiums stop being paid :-S

 

Doh! *-).................just remembered the premiums are being paid by whoever bought the policy :D