Exiting your insurance? This expert suggests selling instead of surrendering

Perhaps influenced by LIC’s stance, the government amended the Insurance Act, 1938 in 2015 to discourage ‘trading’ in insurance policies.

Mehta approached the Supreme Court to clarify that a ‘one-time assignment’ was not considered ‘trading’ in life insurance. The court ruled in his favour saying that a ‘one-time assignment’ was not considered ‘trading’ in life insurance.

However, a secondary market of life insurance policies where multiple trades could happen could not be allowed. The Supreme Court judgement came in December 2015, but a bill passed in Parliament had already empowered insurance companies (via March 2015 amendments) to reject assignment requests if they were deemed not bona fide, not in the interest of the policyholder or public, and intended for trading the policy, explained Sanket Kawatkar, a fellow of the Institute of Actuaries of India and director at Wisdom2Wealth, a financial awareness firm.

Now, as the founder-director of Aceso Endowment Services, Mehta has set up a trust structure to facilitate the sale (assignment) of insurance policies. He targets the nearly ₹1.33 trillion worth of policies surrendered in 2023-24, which he believes could have been sold instead.

According to Mehta, policyholders looking to surrender can sell their policies to his trust (with Aceso as the settlor). Mehta would pay them the surrender value and a part of the death benefit as an incentive. Normally, policyholders forfeit any claim on the death benefit upon surrender.

The trust will issue pass-through certificates to allow investors to receive the cash flows from the assigned policies. This will also make the investors the trust beneficiaries as well, albeit a different class.

This assignment is tax-free for the policyholder as the 2023 Finance Act exempts life insurance proceeds that are less than the premiums paid from income tax.

In case of a sale, Mehta plans to offer an amount equal to the surrender value, which is always less than the total premiums paid. For instance, if a policyholder has paid ₹3 lakh over three years and receives ₹2 lakh upon surrender, the ₹2 lakh is tax-free.

For the assignee (buyer of the policy), the maturity benefit will be tax-free under Section 10(10)(D) of the Income Tax Act, 1961, creating a win-win situation for both.

Mehta would make his money by earning a spread between the buy price and sell price of the policy. He plans to streamline this process online, with his website generating a quote once the user enters the PAN, policy number and a few other details.

However, the assignment would still have to be registered by LIC after charging a small fee. Mehta feels this can be done in a few weeks’ time.

So far this facility is only available for LIC policies. However, the three-year-old startup, ValuEnable, has partnered with four large private life insurers to offer policy assignment as an alternative to their surrendering policyholders.

“Insurance companies first try to retain policyholders by explaining product features and possible financial loss. If policyholders insist on surrender, then the insurer suggests the option of assignment, an option available in most life insurance savings policies, by connecting them with us,” says Mithil Sejpal, co-founder, ValuEnable.

ValuEnable has a set of interested investors for such policies who could be institutions or individuals. “The standard assignment agreement mentions that the survival/maturity benefit will go to the investor but in case death happens, the death benefit will be split between the nominee of the original policyholder and the investor as per a predefined formula that ensures the investor doesn’t get similar returns whether the life insured survives the policy term or passes away,” says Sejpal.

Notably, surrender withdrawals have been increasing despite the fact that policyholders lose money against total premiums paid. It stood at ₹1.33 trillion in FY24 for LIC compared to ₹1.11 lakh crore in FY23, data from Aceso. Irdai data shows five-year persistency ratio for LIC stood at 50% in 2023. It has been in the range of 35-43% in the last five years for private insurance companies.

That said, creating awareness around one-time assignment feature is good, but a secondary market/trading of life insurance policies could be a better approach.

“The 2015 amendments to the Insurance Act, 1938 have closed the doors for developing secondary market/trading of life insurance policies. However, nothing stops us yet again from seeking an amendment to it to have a well-regulated competitive market to trade life insurance policies,” says Kawatkar.

What you should do

Avoid mixing insurance and investing initially. If you have an endowment life insurance policy (not term insurance), selling provides an alternative to surrendering. However, sale or assignment is still a new and untested exit method.

Consult a Sebi-registered investment adviser before deciding whether to continue, surrender, or sell your policy.