In Singapore, Traded Life Policies (TLP) are used an umbrella term used to describe “viatical settlements” and “life settlements”. They involve the life policies of those who have experienced a decline in life expectancy. Viatical settlements involve the life policies of those who are terminally ill, while life settlements involve the policies of those, typically over the age of 65, who have experienced a decline in health and life expectancy.
A viatical settlement is the sale of a life insurance policy by the policy owner before the policy matures. Such a sale, at a price discounted from the face amount of the policy but usually in excess of the premiums paid or current cash surrender value, provides the seller an immediate cash settlement. Generally, viatical settlements involve insured individuals with a shorter life expectancy, e.g. terminal illness.
From the perspective of the investor, purchasing a viatical settlement is similar to buying a bond with a negative coupon and an uncertain redemption date. The return depends on the seller’s life expectancy and when he or she dies.
A life settlement is a financial transaction in which a policy owner possessing an unneeded or unwanted life insurance policy sells the policy to a third party for more than the cash surrender value. The purchaser becomes the new beneficiary of the policy at maturation and is responsible for all subsequent premium payments.
The market is still not mature here. A quick check from MAS website will find the latest press release of life settlement was way back to 2004.
While it might be too quick to conclude that such products are unethical as you reap return when some people die, Life settlements are an important development in that they have opened a secondary market for life insurance in which policy owners can access fair market value for their policies, rather than accepting the lower cash surrender value from the issuing life insurance company.
In “RESPONSE TO FEEDBACK RECEIVED – POLICY CONSULTATION ON REGULATING THE DISTRIBUTION OF TRADED ENDOWMENT AND LIFE POLICIES”, MAS said
We disagree with the view expressed by some respondents that TEP/TLPs are illegal because the investor does not have an insurable interest in the life policy. We concur with other respondents that a life insurance policy can be considered personal property, and can be assigned, and that the principle of insurable interest need only exist at the time the policy is effected. It is not required for any subsequent assignment of the policy.