TIPs (tradeable insurance policies) is the new buzzword for high net worth investors who are looking for safe investment avenues in an era of falling interest rates.

In TIPs, lapsed insurance policies are revived with the help of high net worth individuals. They are then assigned the policy with the knowledge of the insurance company.

The stakes can be fairly high and the returns are guaranteed and tax free. The returns can increase significantly if the original policyholder dies.

How does it work? Policies that have lapsed after acquiring surrender value have to be first identified.

The investor and original policyholder then come to an agreement on the consideration to be paid for assigning the policy and transferring all its benefits to the investor.

This exercise has to be completed with the knowledge of the insurance company, which then has to reassign the policy.

On assignment of the policy, the investor pays the penalty to the insurance company for reviving the policy and continues to pay the annual premiums.

On maturity of the plan or on the death of the policyholder, the returns are paid to the investor.

This thus makes it necessary for the insurance company to re-assign the policy to the high net worth individual.

TIPs are seen as a big boon for insurance companies as it helps to revive policies that have lapsed.

Life Insurance Corporation of India agents are being roped in by high net worth individuals to identify policies that have lapsed.

Policies lapse if three annual premiums are not paid. The policyholder can get the surrender value provided at least three annual premiums have been paid.

Agents say this is a big business in the US and the UK, and a win-win situation for all parties concerned.

The assignment of the policy to a new holder helps revive lapsed policies, keeping the lapse ratio low for insurance companies. The agent continues to get his annual renewal commission.

The original policyholder gets more than what he would have got as surrender value from the insurance company.

The individual to whom the policy is reassigned gains the most as the returns are guaranteed and tax free.

Most investors prefer short-term policies with a residual maturity of 5-15 years. Investors look for endowment or money-back policies offering high returns, which more than make up for the annual premium payments and payment to the original policyholder.

Returns vary from 6.5-7 per cent in the case of shorter term products to 7.45-8 per cent in the case of polices of 15 years' maturity.

Agents say that TIPs are legal as policies can be assigned to banks or mortgage companies against loans taken.

Housing companies offer a lower interest rate to customers with an LIC policy as the policy is used as collateral, based on the surrender value.

Some LIC officials, however, feel that this money-making game should not be encouraged and consider it illegal.