Traded Life Policies


Q1: What are Traded Life Policies and Traded Endowment Policies?

Traded Life Policy

A traded life policy (“TLP”) is a life policy that has been sold by the original policy owner to an investor other than the insurer itself. TLPs are also commonly known as ‘second-hand’ life policies. TLPs are often the life policies of people who have experienced a decline in life expectancy and would prefer to realise the value in their life policies before the policies mature.

These life policies could either be viaticals or life settlements. Viaticals are life policies belonging to the terminally ill patients with shorter life expectancies, while life settlements belong to people, typically over the age of 65, who have experienced a decline in health and hence life expectancy.

Traded Endowment Policy

A traded endowment policy (“TEP”) is commonly known as a ‘second-hand’ endowment policy . It is an endowment policy that has been sold by the original policy owner to an investor other than the insurer itself. TEPs are often participating endowment policies.

How is a TLP or a TEP Brought to Market?

When a policy holder decides to liquidate his life or endowment policy, he may do so via an individual or company who wants to buy the policy for re-sale. Such an intermediary usually offers to buy a life or endowment policy at a price higher than the policies’ surrender value as offered by the insurer. The intermediary may re-sell the policy to a further investor.

The intermediary may also choose to package the policy together with other life or endowment policies to form the underlying investment of a Collective Investment Scheme (“CIS”), a fund, or a corporate entity.

Throughout the buying process, only existing policies purchased from the original policy holders are used. No new life or endowment policy is created in this process.

What Happens in a Sale

In the sale, both the ownership and benefits of the policy are transferred from the original policy owner to the investor. The obligation of paying the policy premium is transferred either to the investor or an intermediary who has purchased and is holding on to the policies with the intention of re-selling them to a further investor. However, the original life insured remains unchanged.

Where policies have been packaged together with other life or endowment policies to form the underlying investment of a CIS, a fund, or a corporate entity, an investor that buys into such a CIS, fund, or corporate entity would indirectly be buying into the underlying TLPs or TEPs.
Key learning: Remember that if you buy a TLP or TEP, you are obliged to pay the policy premiums until the policy matures or the person whose life is insured dies. The maturity date of your investment may be uncertain.

Obligations when purchasing TLPs and TEPs

A TLP or TEP investor must pay the policy premiums just as if he were the original policy owner. In turn, the insurance company must pay out the benefits based on the terms in the policy contract to the investor when the policy matures or the original life insured passes on.

The obligations of the intermediary to an investor are set out in the contract signed when the TLP or TEP is purchased. Investors should read all the terms and conditions of any contractual document, and make sure they understand the legal implications of entering into any agreement. Investors should not buy the TLP or TEP if they are uncertain about the terms or implications of the contract.

Key learning point: Make sure you read and understand all the terms and conditions before you sign anything. Ask questions if there is anything that you do not understand.

Intermediaries

There are two types of intermediaries involved in the trading of policies, namely:
i. the company or individual, known as the “distributor”, which facilitates the sale of the TLP or TEP to investors; and
ii. the company or individual, which buys policies from policy holders and re-sells or packages the policies as TLPs or TEPs to provide to the distributor.

In certain cases, the individual or company that provides the TLP or TEP to the distributor and the distributor itself may be the same entity.

Intermediaries that buy policies from policy holders and re-sell or package the policies as TEPs or TLPs are not regulated by MAS, whether they are based overseas or in Singapore. Distributors of TEPs and TLPs are also not regulated by MAS, regardless of whether they are based overseas or in Singapore.

Currently, registered life insurers in Singapore do not buy policies from policy holders for re-sale, and also do not distribute TLPs and TEPs. The TLPs and TEPs being sold in Singapore are generally policies bought from other countries.

Q2: Are TLPs and TEPs regulated by MAS? Is the buying of policies and the resale or packaging of such policies into TLPs and TEPs regulated by MAS?

No. There are no MAS administered regulations which govern the sale, purchase and distribution of TLPs and TEPs. This means that any individual or company involved in buying or distributing these policies is not regulated or licensed by MAS.

The only exception to this is if a CIS, a fund or a corporate entity is already regulated under the Securities and Futures Act (SFA), and TLPs and TEPs form the underlying assets of the CIS, fund or corporate entity. In such cases, the CIS, the fund or the corporate entity would be regulated by MAS under the SFA.

Implications

Investors who buy TLPs and TEPs cannot rely on laws administered by MAS to take action against either the intermediary who re-sold or packaged the policies or the distributor of the policies should they encounter any problems with the investment process.

MAS strongly encourages investors who purchase investment products to deal only with individuals and companies that are regulated by MAS. For more information, investors may refer to the MAS' consumer guide on "Pitfalls of Dealing with Unregulated Persons".

However, investors can seek recourse under the Consumer Protection (Fair Trading) Act (“CPFTA”). The CPFTA allows consumers aggrieved by unfair practices to have recourse to civil remedies before the courts. For more information on the CPFTA, please refer to the Ministry of Trade and Industry (“MTI”) website.

Key learning point: Remember that if you buy a TLP or TEP, neither the intermediary nor the distributor is regulated by MAS.

Q3: What are the risks associated with investing in TLPs and TEPs?

Some of the risks associated with investing in TLPs and TEPs are:


  • Life Extension Risk: It is difficult to accurately predict life expectancies. An inherent risk particularly associated with investing in TLPs and TEPs is “life extension risk”. This is the risk of the insured person outliving the indicated life expectancy. When this happens, investors will have to pay the premiums for longer than expected to finance the policy. As a result, the returns to the investor are reduced or may even be negative.
  • Legal Risks: The TLP and TEP products that are currently distributed to local investors are generally policies acquired overseas. This makes it difficult for local investors to assess the quality of TLP and TEP products sold. Should any grievance or conflict arise, investors would need to enforce their contracts against life insurance companies located overseas and deal with the legal system of that overseas jurisdiction. Investors may therefore face significant difficulties enforcing their rights. This is because the legal system of the overseas jurisdiction may differ from that of Singapore’s. 
  • Liquidity Risk: As life expectancies are difficult to predict, investors may need to commit their investment funds for considerable periods of time, in some cases, 10 years or more. Investors may find it difficult to re-sell the policies they have purchased. 
  • Credit Risk: If the life insurance company becomes insolvent, investors are exposed to the credit risk of the life insurance company which issued the underlying life or endowment policy. 
  • Foreign Exchange Risk: The benefits from the policy may be paid in a foreign currency. Investors may have to bear the exchange rate risks of converting these benefits into the local currency.
  • Other Risks: A higher incidence of fraud has been associated with the sale of TLPs and TEPs in countries where these products have been sold for some time. Investors risk losing their principal investment amount if life insurance companies deem a policy null or void due to fraud or other reasons. Social and ethical concerns have also been raised as the investment returns on such products are inversely linked to the life expectancies of the insured persons.

Conclusion

Transacting in TLPs and TEPs involves complex legal, confidentiality, disclosure and risk assessment issues. It is important that investors are well informed and fully understand the nature of the risks involved before entering into contracts involving these products. Here are a few things you should check before deciding to invest in a TLP or TEP.

  1. Understand how these products work. Assess whether such products suit your risk appetite and investment time horizon.
  2. Ask for written materials on the product and read the documents and fine print carefully.
  3. Assess how investing in the TLP or TEP you are considering compares with other investment options.
  4. Last but not least, if you find that you do not understand the TLP or TEP or are not comfortable with its risks, do not invest in it.

Investors can refer to the following MoneySENSE guides for more information:

 

The above information is prepared in collaboration with the Association of Banks in Singapore, Investment Management Association of Singapore and Securities Investors Association (Singapore).