Why can't client’s invest in all types of Endowment Policy?

You cannot currently buy unit-linked policies because there is no scope for us to pay more than the surrender value and then sell them to investors. This is because the value of the units at any time multiplied by the number of units held is the current value of the policy and an investor would not of course be prepared to pay more than that.

They do not yet buy unitised with-profits policies because these types of policies are relatively new. It's possible that Market Makers will be able to make a market in these at some stage in the future.

There are some policies whose surrender values already equal the full value to investors and cannot be improved upon, even though they fit within the general parameters.

Some policies have unusual characteristics. Examples are flexible endowments and industrial branch policies. These are not suitable for trading.

Does the purchaser of a TEP get life cover?

No a TEP is an investment only. The life cover remains effective on the original life assured and would be paid to the investor in the event of the death of the life assured.

What happens if the client dies?

The policy is treated as an asset of his or her estate by the executors. The policy could be sold back to the TEP Trader, surrendered or continued.

How is a TEP invested?

Life office funds are widely spread across all sectors with equities and property representing, on average, around 70% of the total. The skill and expertise of the life companies’ investment managers has produced very competitive returns over the years.*

* Past performance is no guarantee of future returns.

How does the TEP grow in value over the years?

“With-profits” endowment policies receive a share in any excess profits earned from the investments made by the life company. There are two ways that life companies distribute these profits. A “reversionary bonus” is added to the sum assured each year and cannot then be taken away and a “terminal bonus” which is added at the end of the policy's life. Rates of bonus depend on the investment performance of life companies and the way in which they choose to allocate profits.

Will a Market Value Adjustment (MVA) apply to a TEP?

No, provided that the policy is held until maturity.

How secure are TEP’s?

The sum assured is guaranteed and bonuses once attributed cannot be taken away. At the time of purchase TEP’s have a Guaranteed Minimum Value at maturity* which makes them a very low risk investment.

* subject to all premiums being paid to maturity.

What investment return will a TEP give my client?

The actual amount paid out at maturity will depend on bonuses paid by the life company over the remainder of the term of the policy and it is important to realise that bonus rates can go down as well as up. Future bonus rates will depend on investment performance of the life company funds. TEP’s are traded at prices which give investors a potential yield that should compare favourably with that of medium gilts. And as TEP’s are primarily invested in equities this should provide protection against inflation.

Is tax paid on the maturity benefits?

Maturity payouts are made without deduction of tax.

“Qualifying” policies are subject to Capital Gains Tax but gains may be sheltered by CGT allowances.

“Non-Qualifying” policies are tax free to basic rate tax payers and income taxable on a top slicing basis for higher rate tax payers.

For overseas investors the taxation of TEP's will also depend on the tax regulations applicable in their country of residence for tax purposes at maturity.