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Traded Policies - Is there still a market?







By Gerlof Reitsma

Amalgamated Traded Policy Services (Pty) Ltd


Since the Statement of Intent there has been a move to increase the surrender values of policies and more recently to impose minimum surrender values, thus improving surrender values and posing the question whether there still is a market in traded policies?


Traded Policy Market


The trade in second hand policies is an established practice in many countries, including the UK, Australia and the USA. The market consists of 2 parts:


  • Trading of the life cover of the life assured (Life settlements); this is not practiced in South Africa; and
  • Trading due to the intrinsic investment value of the policy (traded endowments)

When a policy is surrendered to the issuing life insurance company, the surrender value is calculated after the insurer took into account:


  • unrecouped expenses relating to the policy;
  • restrictions on policies in terms of the long term insurance act;
  • penalties or disinvestment charges; and
  • contractual limitations on liquidity before maturity date

The market in traded endowments exists due to the available surrender value of a policy being less than the intrinsic investment value of the policy, should a new investor continue with the existing policy and hold it to maturity. When policies are traded, the following applies:


  • The original policyholder receives more than the surrender value of the policy;
  • The new investor receives a better return on continuing with the existing contract than entering into a new contract.



Gerry Anderson, Deputy Registrar Financial Services Providers at the Financial Services Board said the following: “In terms of the principal of best advice, there would be an expectation on the advisor, intermediary or broker to inform his or her client what would be the best value under the particular circumstances, i.e. surrender or resale.”


FAIS - In terms of FAIS and the General Code of Conduct issued in terms of this act, Financial Advisors has a amongst others, the duty to act with due skill, care and diligence, in the interests of clients and the integrity of the financial services industry.


When dealing with surrenders and replacement of existing financial products Financial Advisors should advise their clients about alternatives, including the option to trade policies for higher value than surrender value where applicable.


Credit Act - In terms of sec 127(1) 4(b) read with section 131 of the National Credit Act (NCA), a credit provider must, when dealing with the goods of a debtor, “sell the goods as soon as practicable for the best price reasonably obtainable”.


This principle applies whether the goods (insurance policy in this instance) is surrendered to the credit provider (i.e. the policy is encashed with the approval and assistance of the debtor) or is dealt with in terms of debt enforcement proceedings.


Common Law - Similar principles were held in various court cases relating to the surrender of and trade in policies. When the policy holder cedes a policy as security for a debt, the policyholder retains a reversionary right in that policy. This reversionary right includes all benefits payable under the policy, including risk and life cover as well as the surrender value or tradable value if the policy is not held to maturity. The policyholder has a right to the benefits available under the policy contract after the claim of the security cession holder is satisfied.


It is clear that surrendering a policy by or on advice of either a Financial Advisor or a credit provider without investigating, considering and where applicable, acting on alternatives, is not

in accordance with the principles of either the Statutes or the common law.


What should the Financial Advisor do?


Firstly consider whether it is appropriate for the client to discontinue the policy. By doing a proper financial needs analysis.


Key considerations are:


  • The continued need for life cover and other benefits available under the existing policy;
  • The available alternatives, including the nature and cost of alternative cover if required;
  • The current insurability of the client;
  • Penalties and other charges imposed if the policy is terminated;and
  • Affordability

In the current economic climate, affordability of continuing with a policy is often an overriding consideration.


Secondly - Consider the value of the policy. Should the client accept the surrender value offered by the issuer of the policy or trade the policy? This depends on the surrender value and the price of the traded policy.


Thirdly - Make a full disclosure to the client of all the pertinent facts relating to the policy. Where a policy is traded, any remuneration received by the Financial Advisor should also be disclosed as required by FAIS.


ATPS provides a service to Financial Advisors that enables them to obtain values for policies, determine whether they are tradable and provide possible buyers for such policies.

Source: Amalgamated Traded Policy Services (Pty) Ltd
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