When it comes to investment, most of us want it to be safe, lucrative and as tax-redemptive as possible. Well, what if you could have one single investment scheme that combines all of the above with a small tweak on the last point, making it 100% tax-free? Yes, you heard that right – NO taxes on the yield. Say hi to pre-owned life insurance policies – one of the top high-return investments that are still little-known to many.
So, how does this work? Let’s dive in.
What is investment in a Pre-Owned Life Insurance Policy?
Simply put, a life insurance policy is a policy already owned by an individual. Now, this can be a great investment option for you through an assignment. Basically, an “assignment” is when the transfer of an insurance policy ownership takes place – from the original owner (“assignor”) to the new owner (“assignee”).
See, if a policy holder opts for a surrender, instead of giving it up altogether they can transfer it to another person. This is completely legal and valid. As per Section 38 of the Insurance Act 1938, “A policy may be transferred or assigned by endorsement on the policy itself or a separate instrument under notice to the Insurer.”
What may drive the policy surrender?
During the tenure of the insurance policy, the original owner may face some financial constraint or personal exigencies. These, in turn, could make it difficult for them to continue with their premium payments.
As a result, the individual may wish to give up their policy in return for a surrender value calculated based on certain conditions. All life insurance companies have a process around this. For instance, LIC policy surrender requires certain forms to be filled to process the surrender request. Same goes for other insurance providers.
How does life insurance policy assignment work?
- The policyholder and investor digitally sign the transfer agreement.
- The insurer receives the signed document.
- Next, the insurer records the assignee’s name and other details.
- Finally, the investor receives a notification from the insurer whereby the investor becomes the new policyholder.
Why is a pre-owned policy one of the best investment options?
For an insurance policy with term insurance of 3–10 years, the average return is 8–12% tax-free (conditions apply). What is the reason behind the high yields in a pre-owned insurance policy? Well, here’s why.
The story behind the high-return investments
You see, when you buy the policy from the customer, you buy it at a surrender value which is lower than the premium amount paid in policy. Hence, your overall returns will be higher than the original yields.
Additionally, if you are buying a traditional policy that was issued before 1st April 2023 and your annual premium is less than or equal to Rs.5 Lac, your maturity amount is absolutely tax-free. What’s your tax on a Fixed Deposit?
On the other hand, for ULIP policies cut-off date for policy issue is 1’st February 2021, and the premium amount is Rs.2.5 Lac for a tax-free maturity payout.
So, it is the perfect opportunity to enjoy tax-free returns and lock in the benefits for the years ahead.
We hope this article has given you something to consider when you think of investment. After all, buying a pre-owned policy translates to a high-return, low-risk investment investment option that is also tax-free.
Unsure of how to get started? Get in touch with us today to kick-start your best investment journey.
