Taking out whole of life or endowment insurance policies was a popular way of saving and investing prior to the evolution of the managed funds industry. Because the premiums were typically not inflation-adjusted, the value of the policies has not kept up with inflation. What seemed like a very high insured value decades ago, enough to retire on even, is now only enough to pay for a decent funeral and perhaps a bit more. Rather than surrender these policies and thereby losing bonuses, policy owners retain them to cover end of life costs. This means they continue paying the annual premium.
There is a way, however, to unlock the value of these old policies to provide cash for retirement. The policy can in most cases be sold to an investor, leaving the life insured unchanged. This is done through the Life Insurance Policy Exchange (www.policyexchange.co.nz). The policy holder receives more than the surrender value and the investor purchasing the policy gets a reasonable return, with the added benefit that if the insured person dies prematurely, the investor receives an earlier than expected pay-out. This has the effect of significantly increasing the rate of return.
This option to sell policies has been in place for a long time. However, there is now another twist. At a time when cashflow is more important that life cover, cash can be withdrawn from policies in partial lump sum payments over a period of time. In this case, part of the policy is sold and part is retained – perhaps to cover funeral costs. It is also possible to add additional value to the policy by increasing premiums. In this way, the policy becomes a retirement planning tool. Funds can be built up just prior to retirement and then withdrawn gradually over the course of retirement.