In today’s world, with hundreds of alternate investment options, there’s a platform that can help investors earn returns from an insurance policy owned by someone who does not want to continue it. Read on to know how.

We spoke to Tarun Bahri, the co-founder and CEO of investment platform The Policy Exchange, and they do something that’s conceptually very interesting- they help investors get insurance policies transferred to them (also known as assignment) from policyholders who do not wish to continue their policies, or are in need of money.

This means:

• The policyholder transfers their insurance policy to an investor, and gets an amount (called as surrender value) up front, before the policy matures

• The investor gets the policy transferred at a discount and gets the maturity value on the date of maturity, earning them an 8-12% return

• The original policyholder still retains partial life cover as the policy stays active, with future premiums (if any) paid by the investor

Let’s do a deep dive on this business model and the company, and talk about the pros and cons of the platform.

About The Policy Exchange

The Policy Exchange, operated by Fairvalue Insuretech Pvt. Ltd. (CIN: U72900HR2022PTC105640), founded in 2022, facilitates a three-way collaboration hub, connecting

• policyholders seeking liquidity

• investors seeking assured returns, and

• insurance companies wanting to improve policy persistency

  Founding team:

• Co-Founder & CEO: Tarun Bahri – 27+ years of experience, with more than 16 years in insurance, 11 years in banking, formerly with Max Life Insurance, Citibank, HDFC Bank, and ABN Amro Bank

• Co-Founder & Director: Naveen – 25+ years in consumer banking & telecom, formerly with Bharti Airtel, SBI Cards, Citibank.

• Co-Founder & Director: Safia – 25+ years in telecom & social sector, formerly with Koshika Telecom, Global Telesystems, Bharti Airtel.

The founding team has rich industry experience, though specific track records in fintech or investment management are not clearly established.

According to Tarun, The Policy Exchange has enabled investments of INR 100 crores till date, with 2,000 investors and more than 20,000 policyholders.

The problem

The founders identified a problem that affects 3 stakeholders – policyholders, insurance companies and insurance agents.

The thing is, some policyholders are unable to continue their policy in financially difficult times. Most of them end up discontinuing the policy and surrender it to the insurance company (in return for the sum of money called the “surrender value”). This not only means end of life cover for the individual, but also translates to a business loss for both – the insurance company and the insurance agent.

The solution

The Policy Exchange aims to address the above challenge by building a bridge between policyholders in need of liquidity, and investors seeking stable, short to medium-term opportunities.

Through the platform, a policyholder can assign/transfer their policy to an investor, who pays them the surrender value (instead of the insurance company) and takes care of all future premiums (if any). In return, the investor secures the policy’s full maturity amount. This arrangement:

• lets the policyholder unlock its monetary value while keeping their life protection partially intact (more on that later)

• gives the investor a decent return opportunity with relatively low risk, and

• keeps insurers and agents happy with policies staying active Seems like a win-win arrangement for all parties here.

The process

Here’s how the whole process of pre-owned policy investment works:

1. The policyholder approaches The Policy Exchange to assign his/her policy

2. The Policy Exchange lists the policy on their platform, along with the indicative return for the investor, based on their internal calculation

3. Investor pays an amount (equal to surrender value) to the policyholder (and pays future premiums, if any, going forward)

4. On maturity, the investor gets the maturity value back

5. In case of the original policyholder’s demise prior to maturity, the respective insurance company facilitates & handles payouts :

   1. The investor receives the committed IRR for the invested period.

   2. The remaining surplus is credited to the nominee of the original policyholder.

Let’s take an example:

If you login as an investor on www.thepolicyexchange.com, you can see the below insurance policies for investment.

Let’s pick the first one and dive deeper:

• You pay INR 78,897 to the policyholder at the time of purchasing the policy. Since there are no premiums left to be paid, this is the only investment you need to do for the said policy (which is why Initial Investment = Total Investment in the above screenshot)

• On the maturity date (15/04/2028), you get the liquidation value of INR 1,01,833, effectively giving you a 10.7% IRR

• In the unfortunate case that the policyholder dies before the maturity date, the insurance company pays out the sum assured in two parts – you get paid an amount that gives you the committed IRR, and the balance is paid to the original policyholder as insurance cover

Okay, now that you know the process, let’s answer a few questions about the platform.

What returns can investors expect?

While the actual returns depend on the exact policy, investors can expect average returns in the range of 8-12%. Due to the way ULIP and Endowment (traditional) policies work, the return would be higher on a ULIP plan compared to an endowment plan.

How are returns taxed?

The taxation of returns is slightly complex. Let’s look at it in detail.

1. If the sum assured is 10 times or more of the premium paid, according to section 10(10D), the below is the taxation applicable on the returns:

   1. ULIP policies:

      1. Issued before 1st February 2021: Tax free

      2. Issued on or after 1st February 2021:

         1. If annual premium <= 2.5 lakhs: Tax free

         2. If annual premium > 2.5 lakhs: LTCG @ 12.5%

   2. Endowment policies:

      1. Issued before 1st April 2023:

      2. Issued after 1st April 2023:

         1. Annual premium <= 5 lakhs: Tax free

         2. Annual premium > 5 lakhs: Taxed as per tax slab

2. If the sum assured is less than 10 times the premium paid, then the returns are classified as “Income from other sources” and taxed as per the investor’s tax slab.

Are the returns fixed or is there some volatility?

The concept of return is slightly different here. There is a fixed return % (IRR) that The Policy Exchange assures the investor. Depending on when the money comes in from the insurance company (whether at maturity or on death of policyholder), the value of the amount may vary, but the return percentage is fixed for endowment/traditional policies. However, for ULIP policies, the returns are tentative, as they are dependent on the return delivered by the underlying mutual fund.

In that sense, the investor can expect a fixed percentage for non-ULIP policies. However, even there, the value indicated is tentative and may be different, depending on when it comes in.

How does the original policyholder still keep their life cover?

As mentioned in the example earlier, the XIRR committed to the investor is calculated based on the money coming in at the time of maturity. Since the investor is paying a discounted value at the time of assignment, they make a decent return. If, however, the original policyholder dies before the maturity date, the money comes in earlier, which increases the XIRR for the investor. In this case, the entire amount is not paid to the investor. They are paid an amount which gives them the committed return (IRR), and the rest is paid out to the original policyholder as life cover.

How are claims managed? What happens in case of the original policyholder’s death?

The investor doesn’t need to do anything. The respective insurance company handles the fund flows. It gives the investor the principal + committed IRR, and the balance to the nominee of the original policyholder.

What’s the typical investment horizon that investors can look at?

While investment horizons can vary, most of the policies that The Policy Exchange lists typically mature in 5 years or less. So this can be considered as a short-term investment (although there are higher term policies on the platform as well).

Is it a regulated product?

The base product is an insurance policy, which is regulated by IRDAI. The process of policy assignment is also legally governed by rules under Section 38 of the Insurance Act, 1938. However, The Policy Exchange is a platform, and not an insurance provider – and therefore not regulated.

So what are the risks?

While the product largely lies in the low-risk category, there are some things that investors should consider:

1. Credit risk: While technically it is not 100% risk-free, the credit risk is very low, since it will only happen in case the insurance company defaults on its payment, which is a rare scenario.

2. Platform & Operational risk: There is a platform risk associated with this. The policy is assigned from the insurance company itself, and the money flows from them to the investor and original policyholder; so financially there should not be an issue. However, in case something untoward happens, or payments are delayed, it could be an operational hassle for the investor.

3. Liquidity risk: The investment carries a lock-in period during which withdrawal is not allowed or will result in loss. Additionally, the policy cannot be reassigned thereafter, so investors must keep these things in mind before investing.

4. Information asymmetry: There is no public information available on the policyholder whose policy is being purchased. So for the investor, there is heavy dependence on The Policy Exchange for doing the due diligence of the policy and policyholder.

5. Counterparty risk: The investor’s payoff depends on the life insurer honoring claims and on the insurer’s solvency and claims processes. If the insurer disputes an assignment or delays claim settlement, investor returns can suffer.

   For example, in rare cases where the policyholder passes away within 3 years of the date of the first premium and the insurance company denies the claim for a legitimate reason, the investor gets an amount equal to the value of the premiums paid till the date of death, while the original policyholder does not get any life cover. In such cases, the investor may or may not get the committed XIRR, depending on the policy terms and the amount paid by the insurance company.

   However, it is worth noting that such scenarios are extremely rare, and here too, the risk is minimal.

6. Regulatory uncertainty: Assignment of insurance policies is a practice that is legal and governed by Section 38 of the Insurance Act, 1938. However, there is a regulatory risk in case rules and regulations change.

So why invest in pre-owned Insurance instead of FDs or debt funds?

There are a few compelling reasons why investors would want to consider investing in pre-owned insurance policies:

1. Higher returns: The return that you get with this asset class is in the range of 8-12%, which is higher than most FDs and mutual funds

2. Diversification: It helps you diversify your wealth across an alternate asset class so that if your mainstream assets are not performing well, there is something to fall back on

3. Low-risk: Pre-owned insurance policies are a relatively safe investment avenue. As long as the paperwork is done correctly, there is an extremely low chance of the investor not getting the required returns

Our verdict?

The Policy Exchange seems to be a low-risk, innovative platform for investors looking to make short to medium-term returns. However, investors should keep the above cited areas in mind before investing.

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Please note that this is an opinion blog and not an official research or investment advice. This blog neither encourages nor discourages you from investing in any particular asset class or platform.

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