Owning a life insurance or an endowment plan entails significant long-term financial commitment and policyholders should stick with them until maturity to enjoy the full protection and investment returns they bring. Nonetheless, unforeseen financial setbacks due to a job loss or a divorce, which involves the splitting of assets with a former spouse, could cause a policyholder to surrender the policy or discontinue the paying of premium.

When policyholders suddenly stop paying premiums on their insurance products, policy loans, which policy owners can borrow against their accumulated funds, would usually kick in to cover for the shortfall. Once policy loans set in, the investment value of insurance policies will dwindle. Over time, the policy’s value could fall to zero. In most cases, financially burdened policyholders would just let their policies lapse or surrender them for cash.

In either case, policyholders are not getting the best value for their policies, according to Lim Wah Tong, executive director at PhillipCapital Group and founder of Purvis Capital, a specialist investor in traded life policies (TLPs) and traded endowment plans (TEPs). Apart from surrendering the policy to the insurance company, policyholders could sell it to a third party for a better value, says Lim, who started Purvis with other PhillipCapital colleagues in June last year.

Not many local policyholders are aware that they can sell their life policies to financial intermediaries such as Purvis Capital, observes Lim. In Singapore, unlike other jurisdictions such as the UK, there is no regulation that requires insurers to inform their clients about the viability of selling their policies to third-party organisations that trade TLPs and TEPs on the secondary markets. Many local financial advisers and insurance agents also fail to inform clients who wish to surrender their policies of such an option, Lim points out. This has led to the common perception that policyholders are restricted to surrendering the policy to their insurers.

Selling policies for better value
Policyholders who wish to terminate their policies can obtain a better value than the “surrender value” quoted by their insurers, Lim says. They can seek out third-party companies that offer a price typically 3% to 10% above the surrender value.

When these firms buy over the policies, which remain “in force”, the original insured doesn’t change, Lim explains. But the third party takes over the obligation to pay the premium to the insurance company and is entitled to receive the insurance payout upon the death or disability of the original insured or when his endowment product matures.

These third-party buyers are investors who seek out surrendered insurance policies as an alternative asset class that yields stable returns and offers diversification from traditional capital market instruments such as stocks and bonds. These intermediaries could also resell the policies under their portfolios to other institutional investors for a higher price.

Apart from Purvis Capital, there are others such as REPs Holdings and Conservation Capital operating in the second-hand life insurance market, which started in Singapore in the early 2000s. Since it began business, Purvis has spent about $2 million to acquire about 50 insurance policies and endowment plans.

According to Lim, in some extreme cases, the difference between the insurance company’s surrender value and what a third-party firm offers can be quite stark. He recounts one case in which Purvis offered $24,000 for an endowment that had near-zero surrender value with the insurance company.

“A policyholder bought a 10-year endowment through a bank. The policyholder gets protection for 10 years but pays a yearly premium only for the first five years. After two years, the policyholder had paid $60,000, or $30,000 a year. The policyholder wanted to surrender at the end of second year, but the surrender value was near zero. We offered $24,000 instead, or 80% of the yearly premium paid,” says Lim.

That endowment policy had a near-zero surrender value in the second year because most of the accumulated funds paid by the policyholder had been used to cover front-end expenses incurred by the insurance company, according to Lim. Endowment policies offered by insurance companies have little cash value during the initial years of ownership. Most of the gains are only distributed to endowment policyholders during the final few years before the maturity of these policies.

Purvis could offer a significant value to that endowment policyholder because it has a different cost structure from insurance companies and is also taking on the investment risk of the insurance company, Lim points out.

Indeed, local cash-strapped policyholders, who are thinking of surrendering their policies, could get a quote from Purvis Capital or REPs Holdings on the valuation of their life insurance or endowment products. They can submit information about their policies on the websites of these companies, which will get back to policyholders with a policy valuation.

As Lim sees it, the local insurance industry has to address the “policy surrender issue” because policyholders had not received a fair value on their surrendered policies in the past.

Policy surrenders up 12% since 2010
In recent years, more policyholders in Singapore seem to be surrendering their policies. Based on the Monetary Authority of Singapore’s 2014 insurance statistics, policyholders claimed $997 million through the surrender of life insurance products in 2014. This is a 12% increase from 2010. “Insurance policies are long-term saving and protection policies. Generally, you should complete the whole cycle from the time you buy them until maturity. But when the economy is bad, there is a higher incidence of surrender. Regrettably, insurance companies’ expenses are front-end-loaded, so when people surrender early, they pay a heavy price,” Lim says.

More importantly, the Purvis Capital founder feels that insurance companies themselves, rather than staying silent, ought to do their part by informing policyholders about the alternatives available to them when they surrender their policies, even if that is not required by the regulator here.

“At the moment, MAS does not require such a disclosure. Insurers do not want to disrupt the status quo, so they keep silent and, as a result, most policyholders are unaware of their options. In the West, it’s a consumer right. The captains of the industry here should do what is right for their clients even if regulations do not require it,” says Lim.

This article appeared in the Personal Wealth of Issue 733 (June 20) of The Edge Singapore.