Dollars And Sense (2020)
Resale Endowment Policy: How You Can Earn Higher Investment Returns Without Taking Additional Risk
Investing in pre-owned endowment plans is not only legal, but also contains highly desirable features.
This article was written in collaboration with Reps Invest – the largest service provider for local resale endowment policies. All views expressed in this article are the independent opinions of DollarsAndSense.
Risks and returns are two important factors we need to consider when investing. Given a choice, all of us would naturally prefer to have higher returns. However, many of us may also be unwilling to take on the additional risk that comes with higher returns.
One common product that many Singapore investors will consider are endowment policies. Endowment plans are typically considered as lower-risk product because unlike stocks or mutual funds, most endowment policies come with certain guaranteed returns, as long as policyholders pay all the premiums due and hold the policy till maturity. Endowment plans are useful in helping us work towards different types of investment goals, such as our education fund or retirement planning.
Many endowment plans are called participating policies, which means that additional, non-guaranteed returns, may also be given to policyholders if the insurer’s participating fund performs well. So there is downside protection alongside some upside exposure when you invest in an endowment plan.
What Are Resale Endowment Policies?
When considering endowment policies, most of us would buy a policy directly from an insurer, or an adviser who represents an insurer. After that, our main responsibilities will be to pay the premiums, whether single or regular, and to hold the plan till maturity, in order to receive the returns promised.
Besides buying new policies directly from insurers, another lesser-known way is to buy resale endowment policies from a service provider.
Resale endowment policies, also known as traded endowment policies, are basically existing endowment plans (or whole life plans) that have been given up by their original policyowners before maturity.
However, instead of surrendering the plans to the insurer, the original policyholders sell it to a resale endowment provider at a higher price as compared to the surrender value.
One such company is Reps Invest, the largest service provider for local resale endowment plan. Think of this process as similar to selling your used car to a second-hand car dealer at a higher price, instead of deregistering your car which would fetch you less money. These policies, like a used car, are then subsequently repriced and sold to interested investors.
With resale endowment providers, plans that are no longer wanted by their original owners continue to stay in effect so that the promised returns, both guaranteed and non-guaranteed, can be enjoyed by the new owners of the endowment plans upon maturity.
Why Investors Choose To Buy Resale Endowment Policies Instead Of Getting New Policies?
To understand why some investors may consider resale endowment policies instead of new plans, we first need to understand how endowment policies work.
As explained in this Business Times article, most long-term endowment policies offered by insurers can be segmented into two stages.
The first stage is the accumulation phase. This is when cash value of the policy typically grows at a slower pace because part of the premiums paid is going into covering the expense of the plan, such as the distribution cost.
The second stage is where the cash value of the policy starts to build up quickly, thanks to the earlier bonus being earned on the policy and this is the period in which the policy becomes really attractive to investors.
The problem with buying an endowment policy directly from the insurer (e.g. a 20-year plan) is that in order to get to the attractive stage two (next 20 years), we first need to go through stage one (first 10 years). But what happens if you want to skip stage one and get straight stage two?
This is where resale endowment policies come in.
Advantages Of Resale Endowment Policies.
Resale endowment policies are a great investment option for those who are looking to invest in endowment plans, but would like to 1) generate a higher return over a 2) shorter period of time. Unlike buying a used car, which could be considered as an older, inferior product, the good thing about resale endowment plans are that older, existing policy can be said to be more attractive to own.
# 1 Higher Returns: Since you are entering the policy during its high growth stage, you skip the slow initial growth stage where there are high policy costs (commissions/setup fees) being incurred.
# 2 Shorter Duration: Instead of starting a new policy that might only mature in 20 years, you only need to continue to pay for the policy and to hold it for its remaining tenure, which would be much shorter than a new plan.
According to Reps Invest, the returns of a 10-year resale endowment plan could give investors double or more than the returns of a new 10-year endowment policy.
This is a win-win-win for all parties involved. The insurer benefits because the policy is not surrendered prematurely and is held till maturity. Sellers benefit because they are getting a better price compared to what they will receive had they surrendered their plan. Buyers benefit because they are getting the benefits of a 20-year endowment plan even though they only need to hold it for a shorter duration. In other words, investors can park their money for a shorter duration, be exposed to similar risk, and achieve a higher return.
Disadvantages Of Resale Endowment Policies
One of the things to note about investing in resale endowment policies is that unlike buying a new endowment policy directly from an insurer, you do not have as much flexibility in customising the plan to your preference. For example, you can’t customise the sum assured, payment period or duration of the policy.
Instead, you can only select the resale endowment policies based on what’s available for sale. It’s like getting a second-hand car: you can’t choose the exact colour, age or specification that you want. You can only choose from the pool of vehicles available for sale.
Another important point to note is that while ownership of endowment policies and whole life policies can be reassigned, we cannot change the life assured on the policy. So, if one of the reasons you want to buy a resale endowment policy is to enjoy insurance protection, you need to know that you can’t receive any life insurance coverage from the resale endowment policy since the person who is assured on the policy will continue to be tagged to its original owner.
Read Also: Resale V.S. “New” Endowment Policy
In our opinion, resale endowment policies can give us, investors, higher returns without us needing to take on additional risk. From an investment standpoint, this is great. However, the higher returns we enjoy come with some restrictions. We have less flexibility to choose the type of plans we want and can only choose to buy what’s available. Also, we don’t get life insurance coverage, at least under our own names, either.
Here’s a handy recap of the major pros and cons of resale endowment plans:
If you are interested to find out more about how resale endowment policies work, or explore buying or selling an endowment plan (or whole life plan), you can consider Reps Invest, the largest service provider in Singapore for local resale endowment policies since 2010.
Reps Invest market-leading scale is significant because it allows them to offer various types of resale endowment policy options to interested investors – including regular premium plans, limited pay or single premium plans or anticipated plans (which comes with cash benefits).
Editor’s Note: Currently, the Monetary Authority of Singapore (MAS) does not regulate the purchase, sale or distribution of resale endowment plans and resale whole life policies. As such, companies like Reps Invest are not regulated by MAS as they are not an insurance company and do not provide any financial advice.
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