Imagine buying a brand new car and the sales contract has a repurchase clause which states that the car dealer has sole exclusive rights to buy back the car if ever the owner wanted to sell it. Since the owner is unable to consider any competing offers, it is unlikely the car dealer will offer a competitive price for the car.
Thankfully, such anti-competitive practices in this hypothetical scenario are not true – no such clause can exists that prevents the owner from selling his car for a better price to other buyers. The rights to sell the car to a wider pool of buyers will ensure that the owner will always get a price that is equal to or better than that offered by the dealer.
Now imagine that car was a life insurance policy. Like cars, it is a financial asset owned by most people, and yet few consider comparing prices when they feel the need to sell it.
Insurance companies are always willing to buy back and then terminate a policy. The amount the insurance company is willing to offer is called the policy surrender value. However this surrender value may not reflect the true worth of the policy. Similar to the used car example, the policy owners may be able to get a higher price for their policies in the resale insurance market.
The resale insurance market is where the policy owner can choose to sell (the technical term is assign) their policy to a third party. Unlike surrendering to the insurance company, the assigned policy will continue to exist under the new owner. The rights of a policy owner to assign their policy are enshrined in the policy documents and it is permissible under Singapore laws.
While this concept may be new in Singapore, the resale insurance industry has been part of the United Kingdom financial landscape for many decades and it has proliferated in the last twenty years in United States, Australia, and Germany. In Singapore, the resale insurance industry started in the last few years and awareness of the service has not been firmly established. Regrettably the general public and even most financial practitioners are still not aware that insurance policies can be bought and sold like any financial asset.
Giving up one’s insurance policy is a serious decision as it may mean that the person would be under protected against adverse life situations. Surrendering should only be taken as a last resort when the owner has sufficient insurance protection or has no other means to sustain the policy.
If giving up one’s policy is unavoidable, then the owner’s best alternative is to get an independent offer and then make an informed decision on whether to sell the policy in the resale insurance market or surrender it to the original insurance company.
Obviously some people might feel queasy about the resale market. The strongest objection about selling their policy to an unrelated person is that someone else would benefit from the insured’s death. While it is certainly true that the new owner would receive the death benefits, the primary investment consideration is actually the policy maturity value. The new owner will tend to hold the policy to maturity and collect the maturity payment.
While the decision to sell a policy in the resale market is highly personal, it is important to have this option available to the life policy owners who will ultimately have to decide for themselves. After all, it is always beneficial to have all options laid out so as to make an informed financial decision.
According to the 2014 MAS Insurance Statistic, there are more than 13 million policies in force at the end of 2014 and the average value of all surrendered life policies from 2010 to 2014 exceeded S$900 million per annum. Given the enormous sum of the surrendered policies, policy owners are unknowingly missing out of millions dollars of potential financial gains.
Given that most readers of this article are financial practitioners whose unbiased advice is crucial to your clients’ financial success, it is important to include the resale insurance option when it comes to reviewing your clients’ insurance needs.