While mortgages and endowments are often inextricably linked, there is another market in which endowments exist. The Traded Endowment Policy (TEP) (or second-hand endowment), industry exists to purchase and sell endowment policies – buying policies for more money than surrender value from policyholders and then selling them on as low-risk investment products to advisers and consumers. For advisers, there are earning opportunities on either side of the fence.
Why Trade an Endowment?
A TEP is an endowment policy purchased part way through its term from the original policyholder. Having previously been taken out as an investment; be it to pay off a mortgage or for another reason, some policyholders then make the decision to dispose of that policy. A traded endowment policy company, known as a ‘market maker’, will usually buy that policy for more money than the amount the policyholder would receive by surrendering the policy back to the life office they bought it from.
People may want to dispose of their endowment policies for many reasons. As well as potential mortgage shortfalls, other reasons can include marital breakdown and divorce, redundancy or other changes to personal circumstances. In these situations, policyholders may decide that they no longer want, or can afford, to continue contributing to the policy.
Advice crucial
Professional advice is crucial at this stage as policyholders can make emotional decisions without thinking through the consequences. If policyholders, and their advisers, decide not to retain the policy, they may be tempted to automatically surrender it to the life office, but all options should be carefully considered before final decisions are made. These other options include borrowing against the policy; making the policy ‘paid-up’, which means no longer continuing to pay premiums; taking a premium holiday (where the policy allows them to do this) or selling it to a third party. In some cases, a professional adviser will be able to help a policyholder realise the accrued bonuses, which are a minimum guarantee, may be at a level where it is most sensible to either retain the policy or retain it in paid-up form.
What many policyholders do not realise, and often are not advised on, is that if they sell their endowment policy to a market maker they could obtain an average of 15 to 20 per cent more money than if they surrender to a life office. In addition, as each policy is unique, in many cases the amount a policyholder can obtain over the surrender value is often significantly more – sometimes up to 30 per cent more. For financial advisers, this represents a unique opportunity to really add value to the client/adviser relationship by using their expertise and knowledge to actually obtain additional funds for their client from the disposal of their current policy.
Our calculations, based on the latest Assocation of British Insurers (ABI) figures available, show that policyholders missed out on a collective £90million in 2004 alone by surrendering rather than selling their endowment policies.
Investing in TEPs
While some advisers will be able to add value by advising their client if they are disposing of their policy, there is also an opportunity for advisers with high net worth clients who are advising on investment portfolios.
Once a TEP has been sold by the original policyholder to a market maker, it is then available to be purchased as an investment. At this point it becomes a pure investment vehicle with the life cover remaining with the original life assured.
TEPs allow investment from £2,000 to hundreds of thousands of pounds, and offer a choice of insurance company, capital sum to be invested, level of premiums to be paid and preferred maturity date. They are transparent at the time of purchase, with the new investor and their adviser able to see the price being paid; the level of bonuses that have been allocated to the policy up to the time of purchase; and the amount of future premiums.
A key feature of a TEP is the minimum guarantee, which is made up of the sum assured plus the bonuses which have accrued to date. Those bonuses, which once allocated to a policy cannot be taken away, often exceed both the initial purchase price of the policy and the premiums to be paid to maturity. Together they represent the minimum guarantee, which actually increases as bonuses continue to be added – a unique characteristic of TEPs.
For those saving toward a key target, for example school fees, higher education or retirement, a TEP can make sense because the date of maturity is known from the outset and so an investor can choose a policy with a maturity date that suits their requirements. Historically, TEPs have compared favourably with other low-risk investments such as with-profit bonds, corporate bonds, UK gilts and building society 90-day interest accounts. They can play a strong role in a long-term investment portfolio because they combine safety with growth potential.
Increase in demand
The TEP market is seeing an increase in demand for its policies, driven both by investors in the UK and institutions in Germany which are keen to capitalise on the potential for capital growth from TEPs while benefiting from the low-risk nature of the policy. For advisers helping their clients to dispose of endowments, whether linked to mortgages or not, this is positive news as the demand for policies means that those who wish to dispose might get even more for the policy.
