Buying Traded
Endowments |
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When
considering a traded endowment policy, it is
important to establish ;
- The amount you wish to spend on your
investment.
- How long you wish the investment for
and when it will mature.
- The premimum you will be paying each
month
- Taxation. There are ways in which you
can save money by sometimes buying multiple
policies that mature each year
On
purchase, the policy is legally signed over to you
via a sales agreement and "Absolute Deed Of
Assignment". The life assurance company who the
policy is held with will then confirm you as the
new owner. There are benefits from investing in
endowment policies such as guaranteed return on
investment and the fact that if you buy a policy in
mid term, the set up fees have been mostly
paid.
Buying a Traded Endowment Policy is easy.
First determine your
investment parameters - the lump sum you wish to
invest, the future premium levels and the
investment term. You may wish to purchase a series
of policies to mature in different tax years or you
may wish to concentrate on mutual life offices or
those with large 'orphan assets', which may be
distributed at some future point.
AAP will assist you
in selecting the most suitable policies from those
available from the various market
makers.
Once you have
decided to buy the market maker will supply a
contract note and once payment has been made a Deed
of Assignment will be prepared to transfer all
rights and benefits to you. The Assignment will be
registered with the Life Office confirming the new
policy owner and all documents will be forwarded to
you in due course.
Future premiums are
normally collected by direct debit, but in some
circumstances it is possible to commute all future
premiums as a lump sum
payment.
If
you know your requirements please proceed to our
forms - should you prefer to discuss your
requirements in more detail then either telephone
AAP on 0208 732 5865 or fill our short form and AAP
will be pleased to consider your particular
requirement.
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History of Teps
The market in second-hand traditional with-profit endowment policies was until recently conducted through an
auction house.
In the late 1980's a number of Market Makers
were established who have made this specialised
area of investment more accessible to the general
public and since then we have seen an increase in
turnover from about £6 million per annum in
1988 to around £500 million per annum in the
year 2000. This phenomenal increase in turnover has
been brought about by the very strong demand for
Traded Endowment Policies (TEPs) not only from UK
and offshore individual investors but also from
pension funds, specialist investment trusts and
offshore investment funds.
The market exists because the majority of people
who take out endowment policies do not hold them to
maturity - many are surrendered in the very early
years before acquiring a surrender value. Most are
surrendered or sold later by the original policy
owners because of changing circumstances;
alterations to mortgage arrangements or divorce are
two of the main reasons. As more of these
policyholders become aware that they may achieve a
higher price selling their policy on the
second-hand market, rather than surrendering it
back to the insurance company, the number of
policies available for purchase has increased
dramatically over the last few years.
There would not be a second-hand market in
traditional with-profit policies if there were not
as many people wishing to buy policies as there are
people wishing to sell policies. But the surender
valuation offered by fund managers can be bettered
by these people wish ing to buy. There is therefore
an opportunity to trade the endowments and an
industry has grown around this idea of supplying
improved investor value.
Why buy a TEP ?
A Traded Endowment Policy (TEP) is a
with-profits endowment policy, which the original
owner has sold in mid-term.
TEPs are legally assigned to investors who pay
the purchase price and take over the payment of
future premiums. The life assurance cover remains
on the original life/lives assured, but all policy
benefits on maturity or, an earlier life assurance
payout, are the property of the new owner.
As TEPs are purchased mid-term the policy
already has a guaranteed value made up of the
'Basic Sum Assured' and 'Bonuses Attaching' and the
initial charges have all been paid by the original
policyholder.
The Basic Sum Assured remains constant
throughout the term of the policy and is paid on
maturity or earlier if the original life assured
dies. In addition bonuses are added to the policy
every year and once added they cannot be reduced or
taken away. The existing annual (or reversionary)
bonuses together with the basic sum assured when
the policy is purchased constitute the guaranteed
value which is often higher than the purchase price
of the TEP, meaning that, provided the policy is
kept through to maturity, the new purchaser cannot
suffer a financial loss.
On maturity (or earlier death of the original
life assured), normally, a Terminal Bonus is paid
in addition to the basic sum assured and existing
reversionary bonuses. Terminal bonuses can be very
substantial, and quite often make up more than 50%
of the total maturity value, particularly on
longer-term policies.
In summary TEPs are:
Low Risk - A significant proportion of the value
of the policy is 'locked-in' through the basic sum
assured and attaching bonuses, making TEPs a more
secure form of investment than others such as
equities or property which provide no guarantees.
Inflation Resistant - The Life Office's investment
exposure to equities and property within the
with-profit fund helps offset the effects of
inflation.
Access to Investment Management Expertise -
Investors in TEPs are capitalising on the Life
Office's investment expertise accumulated over many
years.
Smoothing - Conventional with-profit policies
benefit from the 'smoothing' process that has
always been one of the main attractions of the
'with-profit' principle. Each year bonuses are
declared and the Life Office actuaries adjust the
levels of bonus to take account of the fluctuating
investment returns. In determining bonus rates,
some of the investment profits achieved during good
economic times are held in reserve to help maintain
bonus levels during times of economic weakness. The
result for policyholders is that, over the life of
a policy, maturity payouts reflect the returns
achieved on the underlying investments within the
with-profits fund, despite short-term fluctuations
in investment conditions.
Flexibility - TEPs are very flexible. Policies
can be selected with a wide range of maturity dates
to suit an investor's specific requirements.
Investors are not tied-in as policies can normally
be re-traded at any time.
Competitive Returns - Because the initial set-up
costs have already been paid by the original
policyholder, policies can sometimes be acquired at
a discount to the underlying guaranteed value,
enhancing the overall rate of return to the
investor. Currently rates of return, which are all
based on the current levels of bonus* for the
particular insurance company, vary between 8.5% and
14% p.a., depending on the remaining term, and with
careful planning it is often possible to achieve
these returns net of tax.
Windfalls - In addition to attractive low risk
returns there is sometimes the possibility of
additional benefits from demutualisation payments
from some Life Offices and also 'orphan asset
distributions'. Sometimes referred to us
Carpetbagging or "action by carpetbaggers".
* Levels of annual and terminal bonuses are not
guaranteed and can go down as well as up. Past
performance is no guarantee of future performance.
TEPs are normally medium to long-term investments
and if surrendered or re-traded in the early years
it is possible for a loss to be made.
Summary of additional reasons to
buy.
There are all sorts of reasons for investors to
buy TEPs:
- Retirement Planning - either within an
existing pension fund or as an addition to
existing pension arrangements. TEPs are permitted
investments for Small Self Administered Schemes
(SSAS's) and Self Invested Personal Pensions
(SIPP's).
- As a low risk investment as part of a
balanced portfolio.
- As a regular savings vehicle for specific
future capital needs, such as, weddings, school
or university funding, or a special anniversary
holiday.
- As a gift - with possible tax
advantages.
- As an investment within an existing trust.
Corporate Treasury - an attractive alternative to
long term deposits.
- To repay loans or mortgages.
- With the correct advice it is possible that
the proceeds of maturing policies can be
tax-free*.
Get an opinion from AAP now !
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