Traded Endowment Policies
Also known as TEPs. These are traditional with-profits policies that offer a unique mix of capital guarantees and future growth potential.
- Why do people sell these valuable assets?
Endowment policies were traditionally bought to repay mortgages. They are long-term investments and consequently the true value of the policy is not recognised until maturity. The policy value is only realised if the remaining premiums continue to be paid and the policy is allowed to continue to maturity. In addition the policy no longer has the ‘mortgage millstone' of having to reach a fixed target on a fixed date.
This means that policies can be bought at a discount to their real value.
- What makes traditional policies so attractive?
Traditional with-profits policies have a guaranteed sum assured to which bonuses are added. These are known as reversionary bonuses and once allocated, cannot be removed or reduced providing premiums are maintained until maturity.
Bonus rates are usually calculated on a compound basis and should therefore result in a more rapid escalation of value in the later years of a policy. Policies also benefit from any terminal bonus paid at maturity.
- How a TEP investment grows
Traditional with-profits is designed to provide a ‘smoothed' investment return with high levels of capital guarantees rather than the volatility of a direct equity investment. This is achieved through the guaranteed sum assured and reversionary bonus declarations.
The sum assured provides a ‘lifetime guarantee' which is not available on a unitised with profits policy or a with profits bond. In good investment years not all of the investment return is distributed. The balance is placed in reserve to provide smoothed returns in the bad years.
- How does smoothing protect TEPs?
A with-profits fund will regularly review the ‘smoothing' activity to make sure that it balances out over time. A terminal bonus is paid at maturity when the investment returns exceed payouts.
With-profits funds typically invest in three main areas: equities, property and fixed interest securities. It is this three-way mix that allows the potential for long-term investment growth while protecting the assets. The actual allocation varies from company to company and is actively managed to meet different investment conditions, which means that you are reassured that a professional manager is looking after your money.
- Policy Guarantees
With-profits policies are unique because of the levels of guarantee they offer. The sum assured is fully guaranteed assuming that all future premiums are paid.
In addition TEP investments benefit from all of the bonuses added to the policy in previous years and again this value can never fall providing premiums are maintained to maturity. As more reversionary bonuses are added to the policy the value of the guarantee increases.
- The TEPs selected for EGF
We only select policies issued by the top UK life offices. Our selection criteria includes; financial strength, quality and consistency of fund performance, policy administration, actuarial policy and future prospects.
Legal title is established on each policy by regulated legal practitioners before purchase. Clear title on all policies means that Life Offices are legally obliged to pay EGF all benefits attaching to the policies assigned to it as they become due and no other party has a claim to the proceeds.
Sums assured and reversionary bonuses make up the guaranteed value which cannot be taken away once declared. Because of careful stock selection, EGF has maintained a guarantee level significantly above the net asset value, even after allowing for all future premium liabilities. The value of the individual policy guarantees can only increase in the future as further bonuses are added, providing premiums are maintained to maturity.
TEPs are protected by statutory regulations, such as the Financial Services Compensation Scheme (FSCS), formerly the Policyholders Protection Act, which means that each policy's value is guaranteed up to 90% of the current sum assured and reversionary bonuses in the unlikely event of life office insolvency. There is no upper limit to this guarantee.