TRADING OF POLICIES AND INVESTMENTS

An overview of traded policies
Facilitating the sale of policies and investments
Value proposition offered by Polinvest
Valuation methodology
Valuation procedure
Examples of recently traded policies
Important to know
What kinds of policies can be traded?

An overview of traded policies

The surrender value and the true value (fund value) of an insurance policy during the first five years after inception can differ substantially. This is exactly what created the traded policy market with policy buyers realising they could achieve better returns by investing in pre-owned policies as opposed to completely new ones.

Buyers generally purchase at a discount to the true value (fund value) or maturity value, but at a premium to surrender value. In other words, they get more actual value than what they pay for. Certain policies also have a bonus structure, which retards the cash value of the policy during its term. These bonuses only vest annually, on maturity of the policy or on the death of the life insured.

• Benefits of traded policies for sellers: Polinvest provides trading quotes and a sale facilitation service to clients and financial advisers or intermediaries wanting to trade policies or investments. For the policyholder or investor this usually means higher payouts as traded policies offer more value than surrendered policies. What's more, it means immediate access to funds. All restricted policies and investments can be traded instead of obtaining further loans by ceding your policy or investment.
• Benefits of traded policies for buyers: Through a process of restructuring, or alternatively using existing natural maturity dates and values, Polinvest assists in finding markets and trade these policies to individuals or institutions that realise the intrinsic value contained in such policies. Buyers purchase these policies for their personal use on a value-for-money basis or by using a competitive discounting rate, employing historical performance and potential future yields. The purchaser is virtually assured of a superior yield to that of a new product. Trading a policy is exactly the same as buying or selling any other asset: Change of ownership takes place through an outright cession.

Facilitating the sale of policies and investments

Traded policies, also referred to as second-hand policies, offers an alternative to the early surrender of investments or policies as these financial instruments often have a higher intrinsic value than the surrender value offered by insurance companies. All restricted policies are tradable and this is the only way to access the restricted value of your policy.

Polinvest obtains quotes and facilitates the sale of policies and investments offered by all the insurers in South Africa by providing willing and able buyers for insurance contracts that meet certain resale criteria. There is no minimum surrender value rule and no ceiling on the size or number of products traded. We maintain complete transparency throughout the entire trading process, disclosing all fixed costs, the fee structure and total sales price.

Whether or not it is in your interest to trade a policy or investment will depend on your individual personal circumstances. This should be discussed with your financial adviser or we can nominate one to assist you. Bear in mind that approximately 80% of policies with loan debts eventually go on to lapse, in some way due to the unnatural interest charges.
See Polinvest's trading process.

Value proposition offered by Polinvest

Benefits for policyholders

Trading instead of surrendering holds the following benefits for policyholders:

• Receive the best value for your policy or investment as the intrinsic value is always higher than the surrender value, provided it is tradable.
• Obtain immediate access to the restricted cash value of your policy or investment.

Where policyholders are not assisted by financial advisers, it is in the best interest of such policyholders to obtain valuations directly from Polinvest before surrendering a policy or investment.
Request for Valuation (PDF)

See an example of a restructured insurance portfolio and the benefits it can offer you.

See Polinvest's trading process.

Benefits for financial advisers

Provide more options to your clients:

• Provide your clients with best advice in order for them to make informed decisions regarding the trading or surrender of investments and policies.
• Make Polinvest's valuation services part of your compliance procedures and earn a fee on the sale of traded policies and investments. In terms of legislation the intermediary is bound to explore the resale option before surrendering a client's investment or policy.

See the Referral Agreement (PDF).
See an example of restructuring an insurance portfolio.
See Polinvest's trading process.

Benefits for executors of estates

Make Polinvest's valuation services part of your duties in the winding up of an estate:

• Increase the value of the estate by trading policies and investments instead of surrendering them. The higher the value of the estate, the higher your executor's fees.
• Instead of having to transfer restricted investments and policies to the beneficiaries, these restricted insurance products can now be traded to put liquidity back into the estate.
• Earn a fee on business referred to Polinvest.

See Polinvest's trading process.

Benefits for investors

Investing in traded investments and policies holds various benefits:

• Reduced term to maturity
• Superior yield over the term of the investment. Guarantees also available
• Reduced costs as initial costs have been deducted.

Investors must please take note of the capital gains tax implications of investing in second-hand policies.

Valuation methodology

An endowment policy is effectively a contractual savings plan which pays out at the end of the contractual period. Should a policyholder terminate an endowment contract prematurely, this constitutes a breach of contract and certain penalties apply.

According to this breach of contract principle, which is contained in Section 59D of the Insurance Act, should a policyholder surrender a policy during the first 5 years of the policy term, only premiums plus a maximum of 5% will be paid to the policyholder.

The surrender value on such a policy is therefore restricted to a maximum of premium contributions to date plus 5% which is often less than the actual policy value at that point. What's more, policy values are negatively affected by commission payable to financial intermediaries as this commission is debited to the policy upfront.

Polinvest will obtain valuations to determine whether a particular investment or policy is tradable for a higher value than the normal surrender value. Polinvest will disclose the Total Selling Price for which an investment or policy can be traded by means of a valuation certificate issued to the client. We obtain the full additional value (that is not reflected in the cash value) in an insurance policy or investment and pass this on to the policyholder or financial adviser directly.

In transactions such as these, financial advisers are in the position of best advice, since they have intimate knowledge of their clients' financial affairs. The financial adviser then negotiates a fee (part of profit) with his/her client for services rendered.

Valuation procedure

The Request for Valuation form (PDF) enables us and our providers to obtain all the information required from the particular insurance company to do a valuation. Once the valuation has been finalised we will let you know whether the policy or investment is tradable or not.

Should your policy be tradable and you wish to sell the policy, the relevant provider will forward you all necessary trading documentation to be completed and returned to our offices. Payment is effected within 48 working hours of the receipt of all correctly completed documentation and insurance contract in our offices.

Examples of traded policies

Important to know

• Financial advisers and brokers may complete the Request for Valuation form on behalf of their clients if they are appointed as such and in possession of a signed financial adviser agreement. This Request for Valuation allows Polinvest and our providers to obtain the relevant information from the insurance companies.

• All “Restricted Policies” as defined in terms of the Insurance Act or due to product rules, can now be traded to access the cash value thereof.

• All valuations disclose the Total Trading Price for each contract (surrender value plus profit).

• It is important that investment policies and older conventional insurance policies are referred for valuation, because they often offer significant hidden values. All investments and policies that are in a Restricted Period in terms of the Long-term Insurance Act or due to product rules should definitely be referred for a valuation.

• All financial advisers are required to operate strictly within the legislative framework as stipulated by the Financial Intelligence Centre Act 38 of 2001 (FICA), the Financial Advisory and Intermediary Services Act 37 of 2002 (FAIS), Long-Term Insurance Act, Policyholder Protection Rules (LOA Code of Conduct, 1998, also referred to as PPR) and the ASISA Code of Conduct (Code on Replacement).

What kinds of policies can be traded?

Tradable policies and investments include reversionary bonus policies and conventional life and endowment policies, endowment wrappers, single-premium investments, smooth bonus portfolio policies, guaranteed growth and income plans, optional/voluntary term annuities, insurance policies in a restricted period and tranche products. Any of the above products of all insurance companies can be traded, provided it is tradable.

See more information on the types of products that can be traded.

See Restricted Policies – conclusion reached by the Ombudsman for Financial Services Providers in the matter of TG Mashigo vs Old Mutual 31 March 2009.

This is a typical example of where Polinvest could have assisted the client and traded the investment

Also: FAIS Ombudsman : Financial adviser not responsible for clients ill discipline