Prime Minister Narendra Modi’s recent comments regarding the appreciation of LIC share prices have captured widespread attention. Shareholders are rejoicing the high market value of LIC shares, anticipating favorable returns should they decide to liquidate their holdings. However, amidst this excitement, an important point is being overlooked: the purpose of life insurance extends beyond seeking short-term returns from its shares. Due to its unique nature, which differs from other investment products, the public often undervalues and misunderstands life insurance.

Life insurance an undervalued investment: Household investment spectrum consists of a wide range of alternatives, varying in their risk, return and time horizon. Common investors normally tend to compare and mix these investment avenues that are not necessarily substitutable. Due to this ignorance, the return on life insurance is often compared with other investment products like shares. This is comparing oranges with apples. As a result of this misplaced comparison, the life insurance investment is considered as having lower returns compared to other options.

The primary purpose of life insurance is to offer protection against the risk of death. It isn’t intended for short-term returns. Short- or medium-term financial needs can be addressed with products like mutual funds or shares. Life insurance serves as that part of wealth which is kept away from the routine ups and downs of life, safeguarded for the family in the event of the breadwinner’s death. Hence, life insurance investment deserves a unique and significant place in every individual’s investment portfolio.

Unfortunately, this unparalleled value of life insurance is not realized by people. In India, the life insurance penetration measured as ratio of premium to GDP was 3.10 in 2013 and has increased to 3.20 in 2021. Life insurance density is measured as ratio of premium (in US Dollar) to total population. India has life insurance density of 69 which is among the lowest ranking countries with the world average being 382.

Inconvenience of locking the funds for a long term: Commonly the life insurance is bought to manage tax liabilities. The long-term nature of payments to be paid regularly year by year for 5 to 20 years becomes burdensome in many cases and people often stop paying the premiums. India has crores of such policies where the premiums are not continued even after notifications by the insurers. Studies show that factors such as changes in marital status, change in occupation, loss of job, debt-burden , expenses like children’s education, house construction take priority over the premium payment. But the impression that policy pays poor return is the major reason for the life insurance premiums not being paid and the policies turning into lapse policies according to the life insurance jargon. Thus, life insurance is a pool of money to be kept aside for the near and dear ones, from life’s mundane demands. But this virtue of being a compulsory long-term savings product backfires and people just stop paying the premiums along the way as the other priorities take a front seat. Or, worse still, many individuals never buy a life insurance policy because they believe it offers low returns.

However, people do not know that as they are paying the premiums their life insurance policy starts accumulating a value. This value can be encashed if they want.

Formalizing secondary market for life insurance: Life insurance is a property of the policy holder. Once it is purchased it is governed by the property act. Thus, the transferability of life insurance rights, combined with its accumulated cash value means that the life insurance policy is practically like any other item of property that can be assigned.

In countries like the US and Canada, where the financial markets are well developed, life insurance policies are marketed by the policyholders for a cash value.

In India, this market has long existed in the informal sector. For years, moneylenders around industrial towns like Pune, Mumbai, Ahmadabad, and Indore have been transferring the policies of laborers into their names in exchange for random cash payments. This business remains informal and unregulated. Laborers in factories often have employee insurance policies taken out by their employers. However, when factories close due to various circumstances, such as during the pandemic, jobless laborers in need cannot afford to maintain their life insurance policies. The easiest solution is to sell the policy document to a local moneylender, who provides some immediate cash in exchange. Consequently, the policy is then assigned in the name of the moneylender. This market is a secondary market for life insurance policies. In India if it is institutionalized, it would benefit all the stakeholders involved.

A win-win for all stakeholders: A formal secondary market will include institutional investors and market makers prepared to acquire policies through assignment from willing policyholders. In return, these policyholders will receive a justified cash value for policies they no longer require. It encompasses all the elements necessary for a formal market. Firstly, this formalization is justified because the transfer of life insurance policy rights to a third party is similar to property. It is legally permissible through absolute assignment(section 38 of the Amended Insurance Laws 2015).

Secondly, for financiers , this new market offers a novel alternative financial product, with a low-risk, and secured return They stand to gain a competitive return on their deployment of funds. Thirdly, for the existing life insurance companies, this market will enhance the appeal of the life insurance product for potential policy holders since a secondary market always strengthens the primary market. This option presents a fantastic opportunity to enhance the liquidity aspect of life insurance, thereby increasing demand for life insurance products, which can ultimately benefit insurance companies.

Far-reaching Contribution: Formalization of this new market will have wide-spread benefits as it will mark an evolution of a new product and market in India’s financial landscape.

Importantly, formalizing the secondary market for life insurance will help release crores of rupees of value from lapsed and forgotten life insurance policies. The formal market will bring this idle money into the mainstream economy.

(By Ranjit Kulkarni, Research and Strategic Acquisition Head of ACESO)

Disclaimer: Views and facts expressed above are those of the author. They do not necessarily reflect the views of financialexpress.com. Readers are advised to consult their financial planner before making any investment.