Death futures

By Julian Knight
BBC News Online Personal Finance Reporter

Terminally ill people are vulnerable

It seems everything, even death, has its price.

Terminally ill people are increasingly being offered the option of selling their life insurance policies in return for a cash lump sum.

The owner of the policy receives a lump sum to spend while still alive and the purchaser profits by banking the full payout when that person dies.

UK investors can buy individual policies through a life insurance an endowment industry market maker or even plough money into a fund investing in a basket of such traded policies.

Is the financial services industry responding to a genuine need or has the industry which brought us the public pension and endowment mis-selling just plunged new depths?

US origins

The selling of life insurance policies by the terminally ill originated in the United States in the late 1980s.

Some people do find it morally unacceptable but others work on the premise that this is an asset all you are doing is releasing cash from it in the same way you are when you sell your house Max Symonds, Shepherds investment company

At the time it was largely used by AIDS patients who needed cash to pay for often ruinously expensive drug treatments.

The trade is known as life settlement or, in the brutal in-your-face phraseology of US financial services, 'death futures'.

Stateside, the trade in the life policies of the terminally ill has grown into a multi-million dollar industry and now UK investors can partake in the ghoulish gold rush.

Shepherds, a UK investment company, are offering UK investors the chance to invest in a fund which buys a basket of life insurance and endowment policies from dying people.

Longer life

People with terminal dates of between 6 and 36 months can sell their policies in return they receive anywhere between 60% and 80% of its value.

Traders study the prognosis of each policy holder the longer someone is given to live the less they receive as it is calculated that inflation will start to erode investor returns.

Put simply, big profits are made by the traders if people die before their given terminal date but losses can occur if a patient lives on.

Shepherds anticipates a return of up to 10% for investors into its life settlement fund.

Max Symons of Shepherds said: "Some people do find it morally unacceptable but others work on the premise that this is an asset all you are doing is releasing cash from it in the same way you are when you sell your house."

Quick cash

There are huge ethical issues and the potential for mis-selling is mind-boggling Stuart Cliffe, National Association of Bank and Insurance customers

Colin Jackson, director of independent financial advisers Baronworth Investment Services, sees little wrong with the trade.

Mr Jackson told BBC News Online that although the trade may seem unpleasant it could play a vital role to play for some.

"If the choice is selling the family home or trading in a policy the later option is generally quicker and far less disruptive.

"After all, many terminally ill people express a desire to be nursed at home for as long as possible."

But Mr Jackson advises clients to look at selling other assets first such as ISAs and their motor car as they probably have little need for either.

Hearse chasing

Some consumer groups though take a less morally neutral view of the trade.

"This is incredible, it smacks of hearse chasing. People who have been told that they are terminally ill are very vulnerable they need counselling not selling too.

"There are huge ethical issues and the potential for mis-selling is mind-boggling," Stuart Cliffe chief executive of the National Association of Bank and Insurance Customers told BBC News Online.

Leonie Edwards of the Association of British Insurers, the industry body, is also deeply concerned at the potential for bad advice and stresses that the selling of policies is not a case of everyone wins.

"People in this sensitive position need to look at the financial health of the whole family particularly those that are due to inherit. Put simply, it would be sensible for them to take unbiased financial advice."

At present, however, according to the City watchdog the Financial Services Authority (FSA), the trade in life and endowment policies of the terminally ill is not regulated.