“Resale” Endowment Policies – Higher projected returns with shorter time to maturity

by Uncategorized

Article Summary

1. What are resale endowment policies?

2. Benefits: Higher projected return + shorter time to maturity

3. Detriments: Not customizable, no insurance coverage

4. How to replicate the insurance coverage at lower cost

5. How to buy: See our inventory of resale endowments

The Main Takeaways

  • Endowment policies are savings plans marketed by insurance companies as a conservative investment vehicle. In today’s market, a new policy has projected returns of around 1.5% to 3+% per year, depending on the no. of years. Note that returns are projected by the insurer and subject to change.
  • Resale Endowment Policies are policies that have been sold by the original policy owner to an investor. We are selling endowment policies at 2+% to 5+% per year projected returns. Note that returns are projected by the insurer and subject to change.
  • Benefits of buying Resale Endowment Policies: Higher returns, with shorter time to maturity.
  • Downsides of buying Resale Endowment Policies: No insurance coverage. Insurance coverage can be replicated by separately buying a term life policy.
  • How to buy Resale Endowment Policies: Take a look at our available inventory below and contact us at 8288 0681.

Click here to look at our available inventory.

1) What are resale endowment policies?

First, it’s best to explain what endowment policies are. Endowment policies are savings plans marketed by insurance companies as a conservative investment vehicle. It’s often used as a financial planning tool, to ensure that one has sufficient savings to finance a child’s education, or for one’s retirement. These policies also come with a small degree of insurance protection, such that the policy owner would be eligible to claim a payout from the insurer, in the event of death (and sometimes total permanent disability or terminal illness, depending on the specific policy).

Resale endowment policies, commonly known as “traded endowments” or “2nd hand endowments”, are policies that have been sold by the original policy owner to an investor.

Why would the original policy owner sell the policy to an investor?

  • If a policy owner desires to terminate a policy prior to its maturity, the policy owner can surrender the policy back to the insurer.
  • Alternatively, the policy owner may decide to sell the policy to an investor instead, especially if the investor is able to offer a higher price. After buying over the policy, the investor then takes on all future premium payment obligations but is also entitled to any future payouts from the policy.
  • If you know someone who is keen on selling a policy, he/she can fill up this short form for a no obligation quote from us.

2) Benefits: Higher projected return + shorter time to maturity

Consider the illustration below. We use a hypothetical example of a policy that has an 8-year term, premiums payable of $10 annually, and a policy maturity value of $90.

  • For a new policy (top half of illustration), the internal rate of return (IRR) would be 2.6% p.a.
  • For a “resale” or “2nd hand” policy (bottom half of illustration), assuming the policy is purchased on year 5 for $50, the 2nd hand policy owner not only benefits from a higher IRR of 3.7% p.a. but the time to the policy’s maturity is also shorter (only 4 years away).
Why returns of secondhand policies are higher

Case study using actual examples:

We will first look at what a newly incepted 10-year endowment policy offers, and compare them with 2nd hand endowment policies on sale.

For a newly incepted policy:

In the below image, we illustrate the cash flows of two endowment policies, one from NTUC Income and Prudential. These insurers were selected at random and the price quotes were obtained from compareFIRST, a joint collaboration between Monetary Authority of Singapore (MAS), Life Insurance Association Singapore (LIA), Consumers Association of Singapore (CASE) and MoneySense, and the pricing is based on a 32-year-old male who is a non-smoker.

New 10Y Endowment Policies
Source: compareFIRST

For these new policies, the 10-year annualized projected return (IRR) are 1.94% p.a. and 2.67% p.a. for NTUC Gro Saver and Prudential PruActive Saver II respectively, based on an assumed 4.75% p.a. investment return on the insurers’ participating fund. This is indicated in the last row in yellow.

For a “resale” or “2nd hand” policy:

In contrast, the projected IRR for secondhand policies tend to be meaningfully higher. In the below table, we show 2nd hand policies with approximately 10 years left till maturity, with their projected IRRs (rightmost column) that range between 4.0% – 4.3%. The projected return is 1.5x – 2.2x that of the newly incepted policies mentioned earlier!

Projected IRR for resale or secondhand policies tend to be meaningfully higher
Source: Endowment Exchange, IRR figures are based on the assumption of a 31 Mar 2021 purchase and that the policies are held to maturity or to the planned surrender date.

These resale policies are examples of the inventory from our sister company Endowment Exchange. Do check this page for an updated inventory list.

3) Detriments: Not customizable, no insurance coverage

Resale endowments are not customizable

If your intention is to finance a child’s college education 10 years from now, you can easily incept a new endowment policy with a policy term and investment amount that matches that specific financial goal.

However for resale endowments, as the policies have already been incepted, the policies’ maturity dates and upcoming premium payment schedules are fixed. Hence, you may have fewer choices available that matches your desired criteria (and this is highly dependent on the available inventory of the brokers that sell 2nd hand policies).

Resale endowments do not provide insurance coverage to the new policy owner

In every endowment policy, there are two important “name” fields.

  1. Policy Owner: The person who owns the life insurance contract and is entitled to any payouts from the policy. The policy owner has the right to borrow from the cash value of policy, reassign ownership of the policy (i.e. sell the policy to an investor), or surrender the policy back to the insurer.
  2. Life Assured: The person whose life is covered by the insurance contract.

When the endowment policy is sold to an investor, only the “Policy Owner” is changed to the new owner. The “Life Assured” remains unchanged. This means that the investor’s life is not covered by this policy.

For many investors, the intention in buying a 2nd hand endowment is for investment returns and NOT for the insurance component. If that’s the case, these investors would focus solely on the projected investment returns that may be derived from the policy, and whether it makes sense vs other types of investments.

However, for investors who do desire the insurance component, there are ways to replicate the insurance coverage offered by a newly incepted endowment policy, while still enjoying the higher projected returns and shorter time to maturity of a 2nd hand endowment. We will discuss this in the next section.

4) How to replicate the insurance coverage at lower cost

You can replicate the insurance coverage using a “term life policy”

For endowment policies, you can make an insurance claim in the event of death (or sometimes total permanent disability or terminal illness, depending on the specific policy) of the “life assured”.

The criteria to making an insurance claim for a term life policy is very similar. Hence, an investor of a resale endowment policy could potentially attempt to replicate the insurance coverage offered by a new policy, by buying a term life policy as well.

In the below image, we use the projected returns (IRR) from the earlier illustrated examples in Section 2, and include the cost to purchase of a new term life insurance policy (that covers the life of the policy owner). For the term life policy, we used a competitive price quote obtained from compareFIRST, and the pricing is based on a 32-year-old male who is a non-smoker.

Source: compareFIRST and Endowment Exchange

We observe that for this specific scenario, buying a “2nd hand endowment policy + new term life policy” offers a projected return in the low-4% p.a., and looks to be more cost-efficient than incepting a “new endowment policy”.

Assuming an investor bought both a 2nd hand endowment policy + new term life policy, and subsequently passes away, here’s what happens:

  1. The 2nd hand endowment policy will be part of the estate. It can be willed to an intended beneficiary, similar to other types of investments.
  2. The newly bought “term life policy” will pay out the death benefit.

Note: The attractiveness of 2nd hand endowments depends on the prices set by the resale broker, and the cost of term insurance depends on specific factors such as age, whether you are a smoker etc.

5) How to Buy: See our inventory of resale endowments

Link to our available inventory

Personally, we do see the allure of using 2nd hand policies as an investment tool. Consequently, we have set up our own resale broker called Endowment Exchange.

Click here to look at our available inventory.

The link has details on the individual policies including:

  • The latest available benefit illustration provided by the insurer
  • An illustration of the premiums payable through the life of the policy, with the projected maturity or surrender value.

The link is a permanent page that we’ll be updating going forward!

Here’s a summary of our March inventory

For ease, we’ve provided a screenshot of the inventory we currently have in March. For more details, do check out our permanent page (same link as above).

Inventory of Secondhand Endowment and Whole Life Policies
Source: Endowment Exchange

How to buy a policy

Once an investor has shortlisted policies that he/she is keen on, the process of buying a 2nd hand endowment policy is relatively straightforward thereafter. We will meet the buyer at the insurer’s office to execute the policy transfer, and the buyer will have the opportunity to reconfirm the policy’s terms with an independent insurance officer.

Should you have any enquiries on the above policies, do drop us a WhatsApp message at 82880681, or email Hello@EndowmentExchange.com with the policy reference number. It will be our pleasure to guide you through the process.

Do note that we are not financial advisors, and will not be able to give opinions on which policies are “better”.  

Separately, if you have a policy you’re looking to sell, fill up this short form for a no obligation quote!

Surrendering an insurance policy? Pros and Cons of Alternatives

Surrendering an Insurance Policy? Pros and Cons of Your Alternatives

by Uncategorized

Surrendering an Insurance Policy?
Pros and Cons of Your Alternatives

Surrendering an insurance policy? Pros and Cons of Alternatives

1) Types of Life Insurance Policies

2) When would it make sense to Terminate a Life Policy?

3) Alternatives to Surrendering a Life Policy

4) Pros & Cons of Selling vs Surrendering a Policy

1) Types of Life Insurance Policies

What's a Life Insurance Policy?

Life insurance offers protection against the financial loss that can happen after one’s death or if one has suffered a total and permanent disability. Some life policies may even provide retirement income and cover certain health-care costs. 

Types of Life Insurance Policies

There are several types of life insurance policies but the three most common types that we often come across are:

  • Whole Life Policies
  • Endowment Policies
  • Term Life Policies

At the end of 2019, there were over 8.4 million Whole Life, Endowment and Term Life policies in Singapore. The number of these policies in force in Singapore, at the year-ends of 2015 to 2019 is shown in the chart below. No surprise that the numbers have been rising annually, as more Singaporeans learn about the importance of financial planning and protection.

Number of life policies outstanding
Source: Monetary Authority of Singapore, retrieved from https://www.mas.gov.sg/statistics/insurance-statistics/annual-statistics

The above-mentioned life insurance policies protect against mortality but it is also possible for life insurance policies to protect against longevity (where you run the risk of outliving your retirement savings). For Singaporeans, we are automatically enrolled into CPF Life, a life insurance annuity product that pays out a monthly income regardless of what age we live to.

For more information on Life Insurance, be sure to read the consumer guide published by the Life Insurance Association Singapore and Moneysense (click here to access the guide).

2) When would it make sense to terminate a life policy?

Life Policies are a long-term commitment

Buying an Endowment or Whole Life policy is a long-term commitment. Where possible, we encourage policy owners to continue servicing their policies to its intended maturity.

That said, there are legitimate reasons to discontinue a policy.

Reasons why you might want to discontinue
an endowment or whole life policy

  1. Cash is required urgently
  2. Insurance premiums are too burdensome
  3. You have duplicate insurance coverage or have over insured yourself
  4. Desire to pay off existing loans that are charging a high interest rate
  5. There are better investment opportunities (some savvy policy owners had cashed out of their policies earlier this year, as they believed that investing directly in stocks would offer a better return)
  6. Unforeseen events such as divorce, where there is a need to divide assets
  7. You had purchased a policy for your child, who is now an adult now and is not keen to continue servicing the policy
  8. Relocating to a different country and keen to bring all assets abroad

The tendency is to surrender the policy
back to the insurer

When faced with the above scenarios, the immediate reaction for many policy owners is to surrender the policy back to the insurer, without considering the available alternatives.

Surrendering a policy tends to be sub-optimal for the policy owner. In many cases, the surrender value offered by the insurer for Endowment and Whole Life policies is relatively unattractive.

In 2019 alone, over 166k life insurance policies were surrendered in Singapore (see chart below), reflecting an annual surrender rate of approximately 2%.

Source: Monetary Authority of Singapore, retrieved from https://www.mas.gov.sg/statistics/insurance-statistics/annual-statistics Note that we have only factored in Whole Life, Endowment and Term Life policies, which are the most common types of life policies.

But there are better alternatives
to surrendering your policy

Some concerns may be solved without the need to surrender a policy. If we take a step back to identify the key issue faced by the policy owner (for example, a desire to reduce annual premiums OR desire to raise cash in the short-term), there may be ways to solve for these needs without the policy owner having to discontinue or surrender the policy.

For policy owners who are set on surrendering their policy, they may be able to extract more cash by selling the policy to a third parties. Endowment Exchange offers to buy over endowment and whole life policies at prices higher than the surrender value.

In the next section, we list the legal alternatives to surrendering a policy: 1) Selling the policy to a third party, 2) Take a policy loan, 3) Opt for Cash Benefit Feature, 4) Convert Whole Life to Paid Up Policy

3) Alternatives to surrendering a life policy

Beyond surrendering a policy, there may be other options that a policyowner can consider.

Alternatives to Surrendering a Life Policy

  1. Sell the policy to a third-party: There are resale brokers and investors who may be able to offer a higher price than the policy’s surrender value, as they have the intention to continuing servicing the policy as an investment (more details in the next section).
  2. Take a policy loan: The interest rate charged on policy loans is not cheap and typically around 6% p.a., but it may be an appropriate tool to meet short-term liquidity needs or to pay off other outstanding loans that charge even higher interest rates (such as credit card debt).
  3. Opt-in for a policy’s cash benefit feature or withdraw accumulated cash value: Some endowment policies such as the Great Eastern Annual Cashback Endowment (ACE), Prudential’s PruFlexiCash and NTUC Renosave provide the policy owner with an option to receive a cash benefit at periodic intervals (similar to a bond coupon). The policyowner may leave this cash benefit to accumulate more interest in the policy and can be withdrawn at a later date if needed. Opting to receive the cash benefit may help to defray the annual premiums, if cash flow is tight.
  4. Convert a Whole Life policy to a paid-up policy: A paid-up policy does not require the policyowner to pay any more premiums. The downside is that the death benefit will be of a reduced amount.  

4) Pros & Cons of Selling vs Surrendering a Policy

What does it mean to sell a policy?

Some types of insurance policies are eligible for “sale” to third parties. These typically include Endowment, Whole Life and Annuity Policies. We have used the word “sell” loosely here, but the actual process is called an “absolute assignment” of the policy. We explain what this entails.

Each life insurance policy will have a “policy owner” and a “life assured”, both of which can be the same or different people.

  • The “policy owner” is liable to service the insurance premiums and will receive the maturity pay outs or insurance claims.
  • The “life assured” is the person whom the life insurance plan covers. For example, a death pay out is paid on the demise of the “life assured”. 

During an absolute assignment, only the “policy owner” is switched to a different person. The new “policy owner” will be liable to pay upcoming premiums and will be the recipient of any pay outs made by the insurer in future, such as during the policy’s maturity or a death benefit pay out. During the policy assignment, there is no change to the “life assured”.

Benefits of Selling vs Surrendering a Policy

Selling a policy to a third party may allow the policy owner to get a higher price than the policy’s current surrender value. However, for policy owners in need of cash immediately, the downside is that some resale brokers may require a day or two to revert with an offer price.

If you have a policy that you’ve decided to sell, do consider our sister website Endowment Exchange. Endowment Exchange buys over existing endowment policies at prices higher than their surrender value, giving you more cash than if you were to surrender your policy to your insurer.

Click here to get a non-obligatory quotation on your life policy.