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Tep in the right direction

Endowments have become something of a dirty word over the past few months and AAP has seen a sharp increase in the number of policies being sold.

Many of these sales have been for genuine reasons but at least 10 per cent have been panic sales as a result of the endowment furore.

This is the last thing policyholders should be doing, especially when they have paid most of the charges up-front and may still benefit from the long-abolished life assurance premium relief as well as life cover. They may be better advised to take out another investment alongside their endowment to make up any shortfall in its projected maturity value.

Yet there are situations where it is economically the best thing to do or even the only thing to do.

Market-makers will happily buy as many endowment policies as they are offered. There is never a problem in trading an endowment policy. Most can be resold three or four times over, such is the demand for traded endowments as an investment.

This is because investors have not been deterred by lower bonuses on endowments, reflecting lower inflation rates and investment returns in general. What Tep investors recognise is that the guaranteed elements of a mid-term endow-ment policy, combined with investment returns which can compete favourably with many other forms of investment – and which are tax-efficient and low risk – add up to an opportunity not to be missed.

Pricing discount rates for traded endowments currently range from 9 to 13.5 per cent depending on time to maturity.

A further advantage is that investors in traded endowments do not have to pay commission or any of the admini-stration costs associated with new policies. Costs are restricted to the purchase price and, of course, the premiums until the policy matures.

There are two main ways to invest in Teps – through a managed Tep fund or through an individual Tep portfolio. The latter is more suited to high-net-worth investors.

Teps are low-risk, secure investments due to the capital guarantees locked into a policy from inception. Furthermore, the policies are issued by substantial and highly-rated insurance companies which have combined assets of over £400bn invested in gilts, blue-chip shares, property and other secure forms of investment. Bonuses are added to policies each year and big terminal bonuses have typically been included when policies mature.

Such are the arguments for investing in endowments. The real challenge for the IFA is handling a client who has decided to sell their endowment. The most common reasons for surrendering or selling policies are remortgaging and divorce although any policyholder who needs to free some capital could consider selling.

The real problem to be addressed, especially given the current level of distrust in endowment policies, is whether people are selling or surrendering for the right rea-sons. Some clients may find it uncomfortable to disclose the reasons for their policy disposal, for example, if they are in debt. Some may not know what their options are or where to go to for help.

Making clear the option of selling, as well as surrendering, is gradually being addressed by policy providers which have been pressured into making clients aware of their choices. But how does the adviser meet client needs and stop them making the wrong decision?

The answer will seem like a blast from the past – use best advice. It is the raison d&#39être of any self-respecting IFA. It is what puts us in front of our clients – not just new or potential ones but existing ones.

If we regularly review the changing needs and circumstances of our clients, we will not have to wait for them to come to us or find out that they have gone off on their own and done something not in their best interest. Part of best advice is being right where we need to be when clients need us.


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