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TEPs: Net gains

Over the past decade the traded endowment policy market has gone from strength to strength. Once valued at £5m annually, the figure now stands at around £500m annually, with a potential Tep market valued at £1.1bn a year.

Unfortunately, the statistics show that three out of four policyholders still surrender their endowment, often unaware they have an alternative option available.

It is estimated that policyholders could gain up to £100m every year by trading their policies rather than surrendering back to the life office.

There are around 11 million endowment policies in circulation and this means that most IFAs will have clients with an endowment policy.

Despite the fact that the best results are reaped when the policy reaches maturity, it is not always feasible for the client to maintain the policy for the full duration. Disposing of a policy is often brought about through unfortunate circumstances such as divorce or redundancy and it is likely that the policyholder will be keen to move quickly with the sale of the policy. Circumstances change and they may need to release the capital before the policy matures or it might be part of a wider financial reassessment.

Policyholders are aware they can surrender their endowment to the issuing insurance company but this seldom reflects the policy&#39s true value. Trading an endowment usually creates more value than surrendering it. Typically, it is 15 per cent but can be as much as 40 per cent more than the surrender value.

Recent bonus rate reductions by several of the major life offices are likely to affect the Tep market in the very short term with buyers reviewing their strategies regarding purchases and waiting for all the major life offices to declare their new bonus rates before making further substantial purchases.

Since the Tep investor buys policies at a premium above surrender value, that margin of premium is dependent on the buyer&#39s view of where bonus rates are heading and is a crucial factor in what the investor pays for the Tep.

It is possible that life offices will also adjust the surrender values of the policies downward in due course to reflect the new investment environment and recent past performance of their with-profits funds. Presumably, a Tep investor will still be able to pay a market premium above surrender value on many policy types although the extent of that premium paid may not be as great as in the past.

In the short term, the trading margins of the various Tep market-makers will possibly come under some pressure as Tep investors will still be looking for fairly high returns on policies purchased while the reduction in bonus rates means they offer less when buying policies.

This is where the technology for trading Teps via the internet comes into play as it allows costs to be removed from the distribution channel and creates a very useful tool for the Tep market-maker to acquire the ideal policy for their client.

There are many IFAs who may have avoided Teps in the past because the process involved was time-consuming and rather tedious. You are obligated to contact more than one Tep buyer on behalf of your client and in the past this involved phoning and faxing market-makers with policy details and waiting for a response.

In situations where the offer is only a small percentage above surrender value or when there is no offer made on the policy, the IFA may begin to consider whether it is worth dealing in Teps at all.

This is also where the internet can become a useful tool for IFAs and clients. A business-to-business Tep exchange platform now enables the IFA to submit policy details online via the web and get the best offer from several market-makers in a matter of moments. The IFA is then given the option to accept the highest offer online and proceed to close the deal.

With such advances in technology, more policies can be submitted to the Tep market at a much faster rate and traded efficiently without the hassle. The time and cost reductions resulting from trading online also mean that even a small increase above surrender value can still benefit the IFA and their client.

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