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Tep step-by-step guide

Traded endowment policy market maker Beale Dobie&#39s investment manager Tracey Merrit takes us onpart one of a tripthrough an A-Z of Teps.

A is for APMM – the Association of Policy Market Makers. It&#39s appropriate that this organisation is at the top of this list because when choosing a market-maker, one should begin with the list of APMM members. The APMM is a voluntary body set up in 1992 to promote standards and quality in the industry. All its members (and the APMM itself) are regulated by the Personal Investment Authority and have a code of practice to which they adhere.

B is for bonuses. With-profits endowments (including traded endowments) receive a share of any annual (reversionary) and terminal bonuses paid by the life company. This stems from the early days of life insurance when mortality rates were overestimated and significant mortality profits arose. These profits were then returned to policyholders in the form of bonuses. The position is now much more formalised and part of the premium of a with-profits contract is specifically set aside to provide bonuses over and above the basic sum assured under the policy. Annual bonuses, once added to a policy, are guaranteed and cannot be taken away.

C is for the Chargeable Gains Act 1992 – Section 210*. Application of this taxation legislation removes any liability to capital gains tax at maturity for the recipient of a Tep if it was a gift from their spouse who also continues to pay the ongoing premiums. (*Levels and bases of, and reliefs from, taxation are subject to change).

D is for deed of assignment. The legal document which transfers ownership of a policy from the original policyholder to the investor, the “Assignee”.

E is for endowment. A type of life insurance combined with an investment plan which is taken out for a specific term – usually 10, 15, 20 or 25 years. The policy pays out the sum assured at the maturity date or on the earlier death of the life assured. For a higher premium, endowments can be “with-profits” which entitles them to a share in any bonuses paid by life offices.

F is for formula maturity value (FMV). The FMV is calculated by Beale Dobie to provide a consistent figure to discount back to a present market price. It is neither a forecast nor a projection. It is calculated using the current bonus rates for a policy of the same original term (or recent maturity results where bonus rates are not available for a particular series, or where the bonus structure is unconventional). The actual maturity value of a Tep will depend on future bonus rates and past performance is not necessarily a guide to the future. The FMV may not be published to “private investors”. Current rates of reversionary and terminal bonuses for a policy of the same original term may be shown instead.

G is for guaranteed minimum value (GMV). Provided the policy is maintained to maturity, the sum assured and attaching bonuses are secure and therefore constitute a guaranteed minimum value. As further annual bonuses accrue and are locked in, the GMV steadily increases.

H is for health. Unlike with new endowments, the state of the investor&#39s health (or age) is not relevant when they purchase a traded endowment. This is because life insurance cover is not transferred to the investor but remains on the original life assured.

I is for insurance companies. With-profits endowments are issued by most of the UK&#39s leading life insurance companies. Investment clients are comfortable with these well established, household names and we believe few people would feel there were many safer financial institutions.

J is for joint life. A policy may be assigned to two names. There are two different ways in which the assignment can be effected, each of which sets up a different relationship between the two assignees (a solicitor should be consulted for advice if required). Tenancy in common – if either of the two assignees dies before the policy matures or becomes a claim, their share of the policy passes under their will and the other assignee remains with just their share of the policy concerned. Beneficial joint tenancy – if either of the two assignees dies before the policy matures or becomes a claim, the survivorof the two assignees will automatically receive the benefit ofthe whole policy and the policy does not pass under the will of the first to die.

K is for Kleinwort Endowment Policy Trust. One of the many pooled funds, trusts and Oeics that have been launched which invest in Teps. Tep funds allow investment in a spread of many policies from different life offices with a range of maturity dates.

L is for low risk. With-profits endowment policies area relatively low risk investment because of their guaranteed minimum value at maturity. This effectively provides a growing safety net below which the value of the investment cannot fall (see above).

To be concluded next week


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