Investment Portfolio

Second Hand or First Hand?

Many people have been attracted by the fact that they can achieve higher returns with, so called Guaranteed investment products, as opposed to their offshore Bank Deposit account. An alternative which is often overlooked, is the second hand endowment policy which may be bought on the open market. There has been a fair amount of publicity of late concerning the wisdom or otherwise, of using an endowment policy to sit alongside your mortgage when buying a house. The idea is, or was, that the endowment would mature and with the addition of profits accrued over the term of the policy, would pay the lender back his capital. Unfortunately, interest rates have not remained at the peaks of the late seventies and early eighties and so the result has been that the forecasts of maturity values have been hard to sustain. This is not the time or the place to go in to the whys and wherefores, of who should review the policies from time to time. Whether the forecasts were optimistic or not is not really the point. The fact remains that the policies have been, by and large, somewhat disappointing to many investors. However, there has always been an underlying guarantee built in to them and, if one looks upon the addition of the bonuses as the cream on the coffee, they become a very worthwhile savings vehicle.

When people moved house, they very often decided to change the method of repaying the mortgage and decided that they no longer needed the endowment. Their recourse was to contact the insurance company and request surrender. The policy then ceased to exist.

However, there are a number of companies who will act as ‘middle men’ who will buy the policy from the original owner, giving him a slightly higher figure than the insurance company’s surrender value. They will then add a ‘premium’ to this and then market it on to investors. Thus the idea of Second Hand Endowments or Traded Endowments (Teps) as they are known, is developed,

The market is obviously beneficial to sellers who get a slightly higher figure using this route. What about the investor? Well, as the majority of charges have been removed from the policy in the early years, there is little to impede the growth of the policy and with the addition of bonuses and terminal bonuses, which are only paid upon maturity, a very good yield may be expected. For example, policies maturing this year are producing returns of around 9.5%, which certainly compares favourably with your bank account.

There are various companies who market the endowments and they will normally be policies, which have a guaranteed maturity value. The policies themselves will come from household name UK insurers such as Norwich Union, Standard Life, Friends Provident, Clerical Medical, Prudential and Pearl, to name a few.

The new owner of the policy has to continue to pay the premiums through to maturity or, may pre pay them in certain circumstances. Once the policy reaches its maturity date, the proceeds including those bonuses, which have built up over the years, will be paid out.

In a nutshell, it is worth looking at these low risk products, which have a guaranteed minimum return and provide the security and reassurance of well-known UK life offices, who have been around for many years. They have a place in any well-balanced portfolio when it comes to reviewing your general financial plans. One small problem looming on the horizon is, however, the fact that demand is beginning to outstrip supply. It is predicted that this state of affairs will continue and it is conceivable that in several years time, there may be no more endowments around to purchase. The suggestion is , therefore, if you have an interest in this type of investment, don’t wait too long and  be prepared to search the market and wait for the policy that suits you to turn up.

 Steve Sumner.


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