What Are Tradable Insurance Policies and How Can You Invest in Them?
When a life insurance policyholder wants to voluntarily terminate their policy they have the option to sell their policy to a third-party buyer instead of simply surrendering their policy back to the insurer that they purchased it from. Such life insurance policies, which can include whole life, universal life, endowment and investment-linked life insurance, among other, would be referred to as tradable life insurance policies.
Tradable life insurance policies have several features that make them an interesting investment vehicle.
Firstly, life insurance policies come with a fixed tenure, which means they are an ideal asset for portfolio planning and cash flow management.
Secondly, they offer a high degree of capital preservation as the cash value of a life insurance policy is composed of declared and guaranteed returns by the insurer.
Thirdly, tradable life insurance policies offer their investors stable returns as insurance companies have the tendency not to declare all income earned in a successful financial year so that they can keep undistributed returns as a reserve for bad years to smooth out the performance of their funds.
Fourthly, insurance policies can generate a higher return than other comparable fixed income investment vehicles such as government and corporate bonds as highlighted in the performance comparison between popular fixed income funds, money market funds and a model portfolio composed of tradable life insurance policies in the fidentiaX whitepaper.
Finally, the performance of tradable life insurance policies is uncorrelated to the performance of traditional financial assets such as stocks, bonds or commodities. That means that insurance policies can act as an excellent diversifier in multi-asset investment portfolios.
How Can You Invest in Tradable Insurance Policies?
Currently, it is very difficult for investors to buy life insurance policies as the market for tradable life insurance policies is very opaque, lacks a central marketplace and involves the use of several intermediaries. However, this is about to change.
Singapore-based fintech startup fidentiaX is launching the world’s first marketplace for tradable insurance policies. The company is leveraging blockchain technology to create an easily accessible, transparent and trustless marketplace for tradable life insurance policies.
On the fidentiaX exchange, buyers and sellers of life insurance policies will be able to come together to trade tokenized policies on the blockchain. The tokenization of the policies will allow them to become easily tradable and liquid securities that can be accessed by all members of the marketplace. This will also decentralize the process of buying and selling insurance policies as policyholders and third-party buyers can transact with one another directly without the need for intermediaries as all policy documents will be fully digitized and pre-checked by fidentiaX before they are listed for auction on the marketplace.
The fidentiaX’s prototype marketplace is scheduled to launch in early 2018 and could turn into a very disruptive force in the life insurance industry, which has been plagued by a lack of technological advancements for years.