The section allows a one-time assignment in which the policyholder can assign his or her policy to an entity or an individual in exchange for some payout equivalent to the surrender value. The death benefit continues, partially depending on the agreement between the assignor and the assignee.
While Aceso Endowment Services and ValuEnable only offer it for traditional life insurance policies, Policy Exchange focuses on Ulips.
How it works
Nashik-based Rahul Mali had two traditional life insurance plans from LIC and wanted to exit one. His brother told him about the assignment feature, which is popular in Western countries. Mali reached out to Aceso Endowment Services.
“They quoted me nearly the same payout as LIC did in surrender value. Had I surrendered it via LIC, I would have had to visit my home branch physically. It was inconvenient as I work in Pune, and my hometown is Nashik. Aceso did it all online, and I got the money within 24 hours,” Mali said.
In case of Ulip, the surrender value is usually the fund value adjusted for some charges. Since there is a lock-in period of five years, if you stop paying premiums before 5 years, you don’t get access to the fund value immediately, but your life cover ceases to exist. Your fund value (after adjusting for discontinuance charges) goes to the insurance company’s discontinuance fund and keeps earning a basic interest rate. You get this amount after the lock-in period is over.
If you want to access your funds immediately, you can resort to a one-time assignment. “We connect an interested policyholder with a buyer who pays the fund value (on a discount) to the policyholder and remaining premiums to the insurer,” said Tarun Bahri, co-founder & CEO, The Policy Exchange. “We fix a liquidation date of each policy, typically when the five-year lock-in gets over, or longer, depending on policy features. The buyer can either liquidate the policy on the liquidation day or continue holding it till maturity. As for policyholders, their death benefit continues until the policy is running.”
While policyholders can reach out to insure-techs directly, The Policy Exchange and ValuEnable have tied up with various insurance companies to connect with policyholders.
Insurance companies look at it as a retention mechanism. They connect policyholders, who have missed paying premiums or those who want to surrender, with insure-techs so that their policies continue either via one-time assignment or loan against the policy. This improves insurance companies’ persistency ratios. Policies from Bharti Axa Life Insurance, Edelweiss Life Insurance and IndiaFirst Life Insurance are listed on The Policy Exchange’s platform. Aceso mostly offers it for LIC policies. ValuEnable said some of top private life insurers by premiums are its clients, but refrained from sharing their names.
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What’s in it for buyers
The entire premise of a one-time assignment rests on buyers showing interest in such policies. Since payout is less than the underlying policy value in traditional plans, the resultant internal rate of return (IRR) becomes better for the buyer/investor. In Ulips, policyholders receive less than the current fund value. This discount becomes an upfront profit for the investor, improving their IRR.
Take the case of New Delhi-based Abhinav Mohapatra, an engineering consultant. He bought two traditional life plans from ValuEnable. “Both policies will mature in 2030. The original policy period was 20 years, but I got it when only 8 years were due. I paid all the premiums in one go. I expect to get an IRR of 8%. A risk-free rate of 8% is amazing. I wouldn’t get this IRR if I bought the same traditional plan afresh,” he said.
New Delhi-based Abhinav Gupta bought 20 Ulip policies from The Policy Exchange. “I tested the waters with just a couple of policies in 2022. My actual IRR turned out to be better than the expected IRR. On average, I received 14-15% IRR in these policies. Factoring in long-term capital gains tax on the maturity amount, my post-tax IRR has been at least 9.5% in taxable policies,” he said.
To be sure, maturity proceeds in Ulips are taxable as capital gains if the aggregate premium on all Ulips combined crosses ₹2.5 lakh per annum. This applies only for Ulips sold after 1 February 2021. This limit is ₹5 lakh for traditional life insurance plans.
Gurgaon-based Nitin Patnia has a structured approach to such policies. He prefers Ulips where the liquidation date is just a year or less. “This ensures that I make returns in a short span. If the Ulips that I have bought have equities as underlying investments, I will switch them to debt. If underlying debt funds are earning a yield of 6.5%, my resultant IRR becomes 13% thanks to the discounted fund value that goes to the policyholder while the full value becomes my net present value,” he said.
For high-net-worth individuals, insure-techs club multiple policies in a single instrument known as pass-through certificates (PTCs), rated by credit rating agencies. They are sold through a trust set up by insuretechs.
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What about risks?
From the buyers’ perspective, there is hardly any risk because well-regulated insurance companies manage underlying investments. Policyholders on the other hand, get an exit but at a discount. Their loss (discount) is the buyer’s gain. In a traditional plan, their payout is mostly the same as the surrender value by the insurance company, so policyholders have nothing to lose whether they opt for the assignment or surrender. The continuance of partial death benefit becomes an added advantage.
Ulip policyholders, however, must do their risk analysis. The less you get compared to the fund value, the better the policy will be for investors, but not you. There are no regulations around how much you get unlike traditional plans. You must compute how much you will get after five years from the insurance company if you stop paying premiums today. If the amount is similar to what the insure-tech has quoted (after calculating the net present value), it is fine, otherwise assignment may not be a wise idea. Consider regulatory risks as well.
“Buyout as a proposition doesn’t work for Ulips because policyholders are paid lower than the fund value which we don’t think is fair,” said Satprem Mohanty, co-founder, ValuEnable. “Moreover, giving an exit via buyout to ULIP policyholders during the lock-in period is definitely not in line with the intent of existing regulations. For Ulips, loan against policy is a much better option to provide emergency liquidity.”
One-time assignments are emerging as a win-win—insurers improve persistency, buyers earn attractive returns, and policyholders retain some death benefit while accessing liquidity. The trend is still new but should pick uppace going forward.
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