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School of thought

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&#39s 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

redundancy benefit.

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

investment/mortgage products.

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&#39s 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

dealing costs.

Another important point about funds is that all funds, in addition to

expert advice provided by market-makers like Surrenda-link, have their own

actuarial panel.

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&#39s major distributors.


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