Heartland Boy (2019)
HOW DOES RESALE ENDOWMENT POLICY WORK?
Resale Endowment Policies, also known as Traded Endowment Policies, have been around for some time. In fact, a very mature market already exists in the UK. Unfortunately, resale endowment policy as an instrument for investment is not as well known in Singapore. Heartland Boy’s financial advisor did introduce him to this concept a couple of years ago but he was not very motivated to find out more then. Given that Heartland Boy has since experienced several new life milestones (such as being a father to Olympia), he felt that it was opportune to review if resale endowment policy can fit into his investment portfolio. To get there, he first has to understand how does a resale endowment policy work.
WHAT ARE RESALE ENDOWMENT POLICIES?
Just like a HDB apartment, you could either buy a BTO or a resale HDB flat. Endowment policies that start at Year 0 are like BTO flats with fresh leases. On the other hand, resale endowment policies are similar to resale HDB flats in that they have already been incepted and available for purchase on the resale market. An example of how a resale endowment policy works is shown in Diagram 1.
Resale endowment policies (REPs) are essentially standard, regular premium insurance endowment policies that have already begun their lifespans. They are therefore par-policies (i.e. they participate/share in the profits of the insurance company’s par fund) that will yield future bonuses upon reaching maturity. But how did an original endowment policy get re-sold into the first place?
SUPPLY OF RESALE ENDOWMENT POLICIES
Resale endowment policies can only exist when first-hand endowment policies are surrendered before they reach their maturity. Policyholders surrender their original endowment policies for a variety of reasons:
- Inability to service the regular premiums
- An emergency that requires a lump sum of money
- To enjoy immediate capital gains (instead of waiting till policy maturity) if policy’s underlying par fund has performed well
Unfortunately, first-hand policies, especially those still in their infancies, are surrendered at poor values back to the insurance companies. This is where companies such as RepsInvest (REPs Holdings PTE LTD) enter the picture and offer a better surrender value than the insurance companies. More often than not, policyholders would be happy to accept the higher surrender value by “selling” their policies to these companies. This is known as Assignment, which simply meant that their ownership rights have been transferred from the policyholder (Assignor) to the company (Assignee). Assignment is actually a relatively simple and common process. Heartland Girl’s father assigned a whole life policy to her upon her graduation from university. Here are some samples of Assignment forms from various insurance companies.
Note that Assignment is an entirely legitimate and legal process governed under Policies of Assurance Act (Chapter 392)
Having explained what contributes to the supply of resale endowment policies, let’s look at why someone would want to buy a resale endowment policy instead of getting a fresh endowment policy directly?
BENEFITS OF RESALE ENDOWMENT POLICIES
1. HIGHER FINANCIAL RETURNS THAN THE INITIAL POLICYOWNER
Typically, the initial years of the premiums for any regular premium policy are used to pay for a variety of costs such as distribution expenses such as administration and marketing fees as well as the insurance agent’s commissions. This is why endowment policies offer poor surrender values when they are still at their teething ages. Therefore, service providers such as RepsInvest are able to offer better surrender values to original policyholders and make these resale endowment policies available for sale at a higher price.
In a typical resale endowment policy quote, RepsInvest will determine the price discount rate while the current maturity value is determined by the insurance company based on the performance of the par-funds when the endowment policy was re-assigned.
While the service provider will make some profit by reassigning the endowment policy, the purchaser who buys from them can still gain higher financial returns compared to the initial policyowner. This is because an investor who purchases a resale endowment policy need not spend the precious initial years waiting for its cash value to build up. Resale endowment policy offers the opportunity to invest directly into an endowment policy that has already surpassed break-even point (i.e. an endowment with profits policy). Since the hard work has already been done by the previous policyholder, purchaser of a resale endowment policy can derive more benefits by investing closer at the tail end of these policies.
2. FLEXIBILITY IN MATCHING YOUR SPECIFIC INVESTMENT OBJECTIVES
Since resale endowment policies takes its supply from existing endowment policies that have been surrendered to the service providers, they are available in plenty of permutations to suit the investor’s need. For instance, resale endowment policies can vary according to:
- Remaining duration of the policy before its maturity
- Size of upfront/initial payment
- Regularity of premiums
Because resale endowment policies come in such a great variety, there is higher likelihood that an investor will be able to compare and find the resale endowment policy that best meets his/her investment objective.
3. DIVERSIFY YOUR PORTFOLIO
With the merits aforementioned, resale endowment policy is a viable asset class that can be used to diversify one’s portfolio. Besides more traditional and popular asset classes such as stocks and real estate, resale endowment policy can be a more stable and lower risk instrument to consider for your portfolio. It is very important to note that the counter-party risk still lies with the insurance company. The service provider’s role is merely that of a middleman- bringing together supply and demand to create a second-hand endowment policy market.
RESALE ENDOWMENT PLAN FOR HEARTLAND BOY’S PARENTS
After gaining a better understanding of resale endowment policies, Heartland Boy decided that it was not appropriate for Olympia’s portfolio. As Olympia is still very young, she can afford riskier instruments. On the other hand, he felt that resale endowment plan is a good fit for his parents. Heartland Boy’s parents are still working (not that they want to) as they have little retirement savings. They have a small sum of cash saving parked in a bank savings account but that is not yielding much returns. Given their age and risk profiles, resale endowment policy is looking like a worthy investment product that will put them on a disciplined path to jumpstart their retirement funds. Heartland Boy shall speak to his parents to see if they are open to buy and invest in a resale endowment plan.
Disclaimer: This article is written in collaboration with RepsInvest but the views are his own