Will negative media coverage become a self-fulfilling prophecy and will
life insurance companies have no reason to maintain the level of terminal
bonuses with so many people cashing in policies?
Around 35 per cent of policyholders do retain their policy until maturity
and only around 3 per cent of all in-force with-profits endowment policies
are surrendered on the secondary market each year.
It is also worth remembering it is not strictly true that the terminal
bonus is only paid out on maturity. Even when a policy is surrendered or
sold, the price paid to the policyholder is made up of a number of
components, including a proportion of the value of the terminal bonus.
Are policyholders selling their mortgage-linked endowments without
replacing them with an alternative financial product which will ensure the
mortgage is paid off in full?
In Surrenda-link's experience, although the company, as with all Tep
companies, does not offer financial advice to customers, consumers are
generally replacing their endowment mortgages with a straightforward
repayment mortgage plus term insurance for added financial protection.
Recent negative media coverage of endowment policies has tended to
overlook the additional benefits which many of the more recent endowment
policies incorporate such as death benefit and, in some cases, even
The life insurance element of a policy can be a valuable asset in the case
of a bereavement and one which would not be realised with other types of
As an investment, why would investors be attracted to Teps and what are
the pros and cons of Tep funds versus buying individual policies?
Investors are attracted to Teps because they represent a relatively
low-risk investment opportunity with potentially good returns. The risk to
the investor is uniquely minimised because of the nature of the product.
When a mid-term endowment is purchased, not only have front-loaded charges
and costs already been paid by the previous policyholder, the policy also
has a certain guaranteed element provided by the sum assured and the
accrual of declared bon- uses to date.
The bonuses attached to a mid-term policy at the time of purchase are
guaranteed by the issuing life company and cannot be subsequently taken
away. The policyholder is also to some extent shielded form short-term
fluctuations in the financial markets by the practice of “smoothing”, which
all life companies apply.
This means that, over the life of a policy, bonuses are adjusted so that
the life company has the best chance of being able to sustain a certain
level of bonuses, even in lean years.
Can Teps provide a useful tool for financial planning and restructuring,
both on the buying and selling side of the equation?
Investing in Teps is becoming increasingly popular as a means of
longer-term financial planning, for example, for funding retirement
alongside existing pension arrangements.
Planning for the future payment of school fees or university tuition is
another common reason for investing in Teps, as are one-off events such as
Teps offer considerable flexibility in financial planning because of the
range of prices and maturity dates on offer and because they are a
relatively liquid asset which, given the huge demand for policies, can be
resold to a market-maker if circumstances warrant that course of action.
When looking at the best way to use Teps for investment planning, it is
important to consider the pros and cons of the two basic options for
investing. Investors can choose to build up their own portfolio by buying
individual policies via a market-maker's stock list. Alternatively, they
can invest in a Tep fund.
There can be no doubt that the Tep market has been transformed by the
launch of investment trusts/funds using Teps. Surrenda-link has been
instrumental in the development of Tep funds and was closely involved with
conception and launch of the very first Tep fund in 1992. The longevity of
Surrenda-link-advised funds in the market means that the company is privy
to the most accurate and extensive market information about funds and their
performance over time.
Investment funds buy up large tranches of mid-term endowment polices
issued by a range of different life companies. The funds are usually
jointly managed between market- maker and sponsor. Collective investment
vehicles using Teps come in two guises – investment trusts and Oeics.
Open-ended funds offer the greatest flexibility for investors because,
unlike trusts, there is no fixed maturity date. This can be particularly
useful when planning for events which have no fixed date, for example,
The advent of Tep-based funds means that Tep companies which manage
significant portfolios, such as Surrenda-link, have an extended range of
destinations for the policies which they buy. For the individual selling an
endowment policy or bundle or policies, that translates into a better than
ever chance of being able to sell at a good price.
Funds offer other advantages too. One of the major appeals of investing
in a Tep fund is that the risk is spread over a very wide selection of
policies. This means that the peaks and troughs of individual life office
performances are evened out. Funds also offer the reassurance of
professional management by Tep experts who are in a position to make
judgements about the performance of the various life companies and
structure funds accordingly to ensure the best possible returns on
Liquidity is also an important feature of Teps. All funds have a unit or
share price which means they can be readily sold on the market. If an
investor wants to sell on individual policies, they must go through an
auction house or market-maker to sell the policies. This inevitably incurs
Another important point about funds is that all funds, in addition to
expert advice provided by market-makers like Surrenda-link, have their own
The panel will sit on the board of the fund and bring a wealth of
experience to the management of the fund, applying highly exacting criteria
and keeping purchase margins over surrender value at an absolute minimum.
In the future, Tep funds will no doubt develop and diversify further,
offering investors an even greater choice. For example, Surrenda-link has
launched a new Tep fund which is a combination of Teps and commercial
The concept of the mixed fund was developed for use by one of
Surrenda-link's major distributors.