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What Are Resale Endowment Policies, Should You Invest In One?
Endowment policies purchased from insurance companies are often used as a popular capital accumulation tool in Singapore. Typically considered to be low-risk, most endowment policies offer guaranteed returns as long as policyholders make all premium payments and hold the policies until they mature. This is unlike other investment products such as stocks and shares, which offer almost no guaranteed bottom lines in exchange for a more volatile market within which potentially higher returns can be sought.
Additional non-guaranteed returns can also be offered as part of an endowment policy if the insurer’s participating fund performs well, adding another layer of product variation and presenting more choices for the consumer.
What are Resale Endowment Policies
Resale endowment policies, also known as traded endowment policies, are essentially standard, regular premium insurance endowment policies that have already begun their lifespans. The original policyholders, for any number of reasons, chose to surrender their policies before they reached their maturity.
Those reasons often include an emergency which requires them to retrieve a lump sum of money from their investment endeavours, or simply that the policyholder no longer has the capacity to service the remaining premium payments.
Instead of surrendering the endowment policy back to the insurer, the policyholder may instead opt to sell it to a resale endowment provider. This is because surrendering the policy back to the insurance often yields a very low surrender value, particularly in its infancy. In fact, most endowment policies have a surrender value of $0 during the first three years of its lifespan. A resale endowment provider would offer better terms.
The policyholder then signs an Absolute Assignment Form, transferring ownership of the policy from the policyholder to the resale provider, thus relinquishing any rights over the payment and benefits of the policy. This is a fairly straightforward legal process known as Assignment, which is governed under the Policies of Assurance Act.
The resale endowment provider then sells the policy on to another investor who takes on the obligations of the policy and gets to reap the benefits when it matures.
Why Invest in a Resale Endowment Policy?
Theoretically, resale endowment policies are very elegant, because they represent a solution which satisfies all parties involved. The original policyholder obtains more value for surrendering it, the resale provider earns its commission for facilitating a transfer of the policy from the original policyholder to another investor, and the investor now has a low-risk investment product which would typically mature at a sooner time than if he had purchased a new one for himself.
Even the insurance company is amenable to this; actuarially speaking, it is not in their interests either to have their policies lapsed or surrendered before maturity and they would also much rather have the premiums continue to be paid, notwithstanding who the paying party is.
The second-hand insurance market, while already an established fixture in some other countries such as the UK, has yet to really take hold in Singapore. But should a large volume of existing endowment policies be assigned to resale providers, there are potentially plenty of permutations for investors to select from in choosing a resale endowment plan to pick up. These can vary in the regularity and amount of premium payments, as well as the remaining duration of the policies before they reach maturity. Thus, flexibility in catering to an investor’s needs is also a potential upside.
What are Some Potential Drawbacks?
There are elements of unpredictability inevitably bound to the elegance of the resale endowment market.
For one, the Monetary Authority of Singapore (MAS) has warned the public that the second-hand insurance market is neither licensed nor regulated by them. As such, consumers who partake in such transactions “cannot rely on laws administered by MAS to take action against either the intermediary who resold or packaged the policies, or the distributor of the policies, should they encounter any problems”. This is something to take note of particularly if one is investing in a resale endowment policy that is bought from other countries through the intermediary.
The other notable thing to consider is that Assignment of an endowment policy only extends to the legal ownership and rights of the policy. The life assured on the policy, however, is an inherent term in the policy and does not pertain to the ownership of it. As such, it cannot be changed.
Simply put, when someone purchases an endowment policy, there is a life assured element which guarantees a certain pay-out should the policyholder dies before the policy reaches maturity. What the pay-out will be depends on which stage of the policy has it advanced to when the policyholder passes on. When an original policyholder signs an Assignment Form to transfer ownership of the policy to someone else, the life assured element of the policy continues to be tied to the former.
As legal ownership has now transferred to the resale investor, there is no doubt that the death pay-out will be disbursed to him rather than the deceased original policyholder’s estate. The unpredictability comes in the form of the investor not knowing when the original policyholder might pass on. The pay-out amount might then differ from the amount the investor expects to receive upon the policy’s maturity, and at a time that the investor does not expect and has not made allowances for.
This naturally also means that an investor who is looking for life insurance coverage to go with an endowment policy will need to purchase his own.
For a policyholder, despite any compelling reasons to surrender an endowment policy, there needs to be ample consideration that life insurance coverage will also be lost. This may be significant, especially in the middle of a global health crisis.
Policyholders who are having difficulties paying their premiums may receive relief through the Deferred Premium Payment (DPP) scheme, which allows policyholders to defer their premium payments for up to six months, giving them more time to pay their premiums.
While the first six-month DDP window closed on 30 September 2020, a second window has been opened for new applications from policyholders whose premium due date or policy renewal date falls on or between 1st Oct 2020 and 31st March 2021.