Can you go wrong with an assured income plan?Posted on: 16 June 2009 by Gareth Hargreaves
Independent financial advisor Peter McGahan believes you should be careful when choosing an assured income plan.
I have read about an investment called the ARM assured income plan that produces an income return of 10% and is not subject to the vagaries of the stock market and wondered if you had any thoughts on it. Surely after ten years I have had my money back?
I will use the ARM assured income plan to present the difference between marketing and research! For those of you who are not technically orientated you can switch off now as it’s a full on no entry sign for me and any investor we would advise.
Anyhow onto the technical data. With the ARM assured income plan you are effectively buying an investment into a range of life insurance policies by U.S. policyholders who no longer want them.
These policy holders are aged over 65 and have a life expectancy of less than 12 years. The customer no longer wants the plan and rather than encash it they sell it to a manager for slightly more than the surrender value the insurance company is offering.
Your money is invested into the ARM assured income plan which buys these plans and then continues to pay the premiums until death and the death benefit goes to the fund. A large part of the gain will come if the life expectancy is shorter than the assumed twelve years life expectancy of the people they are purchasing the life policies from.
Excellent you might think. Where could it go wrong!? From here onwards is the answer.
Firstly and most importantly the investment falls outside the scope of the financial services and markets act. If ARM is unable to meet its liabilities you will have no claim to the financial services compensation scheme. i.e. you will receive nothing back.
Further risks to consider: What if people live way beyond those 12 years? If they do the investment fund has to maintain premiums for much longer, and as such profits could disappear completely, and the 'income' you are referring to could go with it.
Whilst the marketing part of the brochure talks up the investment, the risk element does the reverse. In fact the disclaimer on the internet for the ARM assured income plan states clearly that this investment is only suitable for “investors who have the knowledge and experience in financial and business matters necessary to enable them to evaluate the risks, tax implications and merits of such an investment”
The risks are further highlighted by the fact that the product you are effectively investing into is highly illiquid. I.e. in a difficult market if you have no buyers the price plummets, and worse still you may not have immediate access to cash.
The return of the ARM assured income plan is also down to each party involved meeting its obligations. There are lots of parties involved thereby catapulting the risk.
There is the chance that the insurance company who is providing the death benefit could be insolvent when the policyholder dies and cant pay the death benefit which would be an enormous challenge to the fund. Does a risk averse cash investor want this complexity?
The investment is also made in Dollars. If the dollar depreciates against the pound, most of your gain could be wiped out. Some investment provider's hedge against this but this plan does not.
Any borrowing or extra ‘gearing’ like this could substantially increase the risk an investor has and furthermore increases in interest rates will have a serious impact on the ARM assured income plan. If you consider the current interest rate environment and in turn the impact of quantitative easing, to consider anything other than increasing interest rates in the coming years is, well, a little mad.
Now you might see that the marketing brochure has a fine looking lady snorkelling, but if you are in anyway interested in time management just cut out the pictures.
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