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.
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