7 Reasons Why You Should Consider Holding Tradable Insurance Policies in Your Portfolio
Tradable life insurance policies are insurance policies that policyholders can sell to third-party buyers who want to add life insurance policy exposure to their investment portfolio. Tradable life insurance policies can include endowment, whole life, universal life, key-man, and investment-linked insurance, among others.
Most life insurance policyholders are actually not aware that their policy is actually an investment asset that can be sold to third-party buyers instead of simply surrendering their policies back to the insurer when they want to access their policy’s cash value.
The market for tradable insurance policies is currently very illiquid, difficult to access and involves using several intermediaries in the process of buying and selling policies. Hence, this asset class has never managed to grow into an attractive market for investors.
However, this is about to change as Singapore-based fintech startup fidentiaX is developing the world’s first marketplace for tradable life insurance policies. The new blockchain-powered platform will bring together policyholders and insurance policy buyers in a transparent, user-friendly and trustless trading environment.
This will not only empower life insurance policyholders to sell their policies for a potentially higher cash value to third-party buyers instead of surrendering them but it will also attract investment managers, corporations, and private investors who want to gain exposure to this interesting alternative asset class.
The most prominent features of this asset class are capital preservation, stable returns, a fixed tenure, potentially higher returns than comparable asset class, and zero correlation to stocks and bonds, among others.
The cash value of a life insurance policy consists of guaranteed and declared returns by the insurance company. In other words, the cash value of a life insurance policy is effectively preserved and backed by the insurance provider.
Therefore, tradable life insurance policies are very interesting for more conservative investors who place a lot of weight on capital preservation as the policy’s cash value effectively comes with a capital guarantee.
Furthermore, insurance companies function in a highly regulated industry, which means they have to meet stringent capital reserve requirements and are, therefore, widely regarded as financially robust companies.
Tradable life insurance policies offer buyers stable returns with a lower volatility comparable asset classes. The reason for this is that insurance companies have the tendency not to declare all revenue earned in a good financial year so that they can keep undistributed returns as a reserve. These reserves are then distributed in bad years to smooth out the performance of the insurance companies funds.
A Fixed Tenure
For portfolio managers who have maturity constraints for their investments, tradable life insurance offer an excellent alternative to bonds as they usually come with a fixed maturity date. This makes the asset class ideal for portfolio planning as well as cash flow management.
Potentially Higher Returns Than Comparable Assets
A study conducted by fidentiaX that compared existing real-world fixed income portfolios with a model portfolio composed of tradable life insurance policies including endowment and universal life concluded that insurance policies will likely outperform similar risk class portfolios.
Tradable life insurance policies can, therefore, not only act as a capital preservation asset class but also as a portfolio performance enhancer.
Elimination of Insurance Setup Costs
By buying an insurance policy off a policyholder instead of purchasing one from an insurer directly allows investors to eliminate the setup costs of a new policy as they are usually paid by the policyholder in the first few years of the policy. Due to the way in which life insurance policies are structured, setup costs such as the underwriting fee and commissions payable to agents are deduced in the first few of years of the policy.
This can make it more profitable for buyers to purchase these policies in the tradable insurance policies market.
While the current state of the tradable life insurance policies market is very illiquid due to the lack of a central physical or digital marketplace, with the launch of the fidentiaX marketplace, tradable life insurance policies will provide an excellent asset class for buyers who want to purchase assets than be turned into immediate liquidity.
On the fidentiaX marketplace, insurance policies can either be resold to other life insurance policy buyers or surrendered to the insurer for the cash value within days.
This gives buyers more flexibility in their cash flow management and portfolio planning.
Finally, tradable life insurance policies can act as an excellent portfolio diversifier as their price performance is uncorrelated to that of stocks, bonds, and commodities.
According to Modern Portfolio Theory, effective portfolio diversification allows investors to generate the highest possible return with the lowest possible level of risk. Through the addition of an uncorrelated asset class to an investment portfolio, the level of overall market risk can be reduced, while expected portfolio returns can remain unchanged.
For this reason, tradable life insurance policies are an excellent diversifier for any multi-asset portfolio, especially for investors focused on fixed income investment vehicles.
The above-mentioned seven reasons are why there is an increasing interest from corporations, investors, and private individuals in the tradable life insurance market. In times where financial markets are troubled with geopolitical uncertainty and largely driven by central bank monetary easing, tradable life insurance policies offer an increasingly attractive alternative to stocks, bonds, and commodities.