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Traded life policies and traded endowment policies

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29 Oct 2018 | 4 min. read

Traded life policies (TLPs) and traded endowment policies (TEPs) are not regulated by the Monetary Authority of Singapore (MAS). Find out why these are called 'second-hand' policies and how they work.

Key takeaways

  • When you buy a TLP or TEP, you pay the policy premiums until the policy matures or until the death of the life insured.
  • The maturity date of your investment may be uncertain.
  • MAS does not regulate intermediaries nor distributors of TLPs and TEPs.

What are TLPs and TEPs?

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.

In the case of a traded endowment policy (TEP), it is an endowment policy that has been sold by the original policy owner to an investor other than the insurer. TLPs and TEPs are commonly known as "second-hand" policies.

What happens in a sale

When a policyholder decides to liquidate his life policy or endowment policy, he may do so via an individual or company that wants to buy the policy for resale. Such an intermediary usually offers to buy the policy at a price higher than the policy’s surrender value offered by the insurer. The intermediary may then re-sell the policy to another investor.

Throughout the process, only existing policies purchased from the original policyholders are involved. No new life or endowment policy is created.

Both the ownership and benefits of the policy are transferred from the original policy owner to the investor upon sale. However, the original life insured remains unchanged. 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.

This obligation will continue until the policy matures for TEPs or till the insured passes on in the case of TLPs.

Key learning point: Remember that if you buy a TLP or TEP, you are obligated to pay the policy premiums until the policy matures or the insured passes on. The maturity date of your investment may be uncertain.

Are TLPs and TEPs regulated by MAS?

MAS does not regulate the sale, purchase, or 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.

Currently, registered life insurers in Singapore do not buy policies from policyholders for resale, and do not distribute TLPs and TEPs. The TLPs and TEPs being sold in Singapore could either be policies originating from local insurers or policies bought from other countries.

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

See also: Dealing with unregulated persons

Implications for investors

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.

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 insured passes on.

The obligations of the intermediary towards the investor are set out in the contract 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.

Investors can, nevertheless, seek recourse under the Consumer Protection (Fair Trading) Act (CPFTA). The CPFTA allows consumers aggrieved by unfair practices to pursue civil remedies before the courts.

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.

Note

MAS strongly encourages investors to deal only with individuals and companies that are regulated by MAS.

What are the risks?

TLPs and TEPs have the following risks:

Life extension

  • If the insured person outlives the indicated life expectancy, you will have to pay the premiums for longer than expected to finance the policy.
  • As a result, your returns may be reduced or negative.

Legal

The TLP and TEP products that are currently distributed to local investors could be policies acquired overseas. In such cases, it may be challenging to:

  • Assess the quality of TLP and TEP products sold
  • Enforce your contract and dealing with an unfamiliar foreign legal system, should disputes arise

Liquidity risk

  • Life expectancies are hard to predict. You may need to commit your investment funds for an uncertain and long timeframe — in some cases, 10 years or more.
  • You may find it difficult to re-sell the policies if you wish to exit the investment.

Credit risk

You are exposed to the credit risk of the life insurance company which issued the underlying life or endowment policy.

Foreign exchange risk

The policy benefits may be paid in a foreign currency. You may have to bear the exchange rate risks of converting these benefits into the local currency.

Fraud and other risks

  • Fraud has been detected in some countries where such products have been sold.
  • You risk losing your investment if the life insurance company deems a policy null or void due to fraud or other reasons.

Last updated on 08 Nov 2018