You have not worked so hard every day only to see your wealth accumulated through the years go down the drain.

Whatever your financial needs and future plans may be, here are 7 major reasons why Traded Endowment Policies can be used to your benefits.

Low Market Risk

The Traded Endowment Policy (TEP) market in the UK is a highly regulated industry. It has been around for more than 100 years and the governing body has well placed infrastructure to protect the interests of investors.

High Capital Guarantee

Every Traded endowment policy (TEP) that you invest in has a “Capital Guarantee” value in the form of the sum assured plus the attaching bonuses. These values once allocated cannot be reduced and removed. You can choose percentage of Capital Guarantee from 70% to 100%

No Yearly Management and Service Fees

Unlike mutual funds, as a TEP owner, you are not charged a yearly management or service fees that will in turn marginalize your returns. Thus maximizing your potential gains from the profits paid out.

Tax Benefits

If you are a non-UK resident ie Singaporean, your returns from TEP are not taxed. (However, please check with your respective tax agents with regards to your unique situation.)

Flexibility

At your own discretion, you may have a choice of maturity dates ranging from 3 years to as long as 10 years. The maturity dates are fixed so there is certainty in your financial planning. The best part is since there is an existing market for TEPs, you as an owner can choose to sell it anytime you wish to.

Zero Cost to the Investor

A unique feature of TEP is that the cost of transaction is to be borne by the seller. This means that as an investor, what you pay is what you get!

Competitive Returns

Majority of the TEPs have been in forced for many years and are close to their maturity dates. Bulk of the bonuses is only paid out at the final year. By taking over a TEP instead of starting an endowment policy from scratch, you are maximizing your returns per year.

A Traded endowment policy (TEP) is a traditional with-profits endowment plan that the original policyholder has sold in the TEP market (to a market-maker) at a price greater than the surrender value offered by the insurance company.

The surrender values quoted by many life offices often do not fully reflect the true value of the policy as a continuing contract, as such, many investors recognise that such policies represent a low to medium risk investment opportunity and are willing to offer for more than the surrender value.

The new owner takes over the payment of future premiums and at maturity of the policy or death of the original life assured, receives all benefits from the policy.

This trade is partially governed by a trade body, The Association of Policy Market Maker.

TEP can offer a more attractive rate of return than fixed interest government bonds and is less volatile than a direct investment in shares.

As TEPs are purchased mid-term, the policy already has a guaranteed value made up of the ‘Basic Sum Assured’ and ‘Bonuses Attaching’ and the initial charges have all been paid by the original policyholder. These bonuses, once declared, cannot be taken away. The sum assured and bonuses declared constitute the ‘locked-in value’.

In many cases the ‘locked-in value’ contained within the policies are greater than the prices paid, illustrating the low-risk nature of Traded Endowment Policies as an investment.

Finally on maturity, a further bonus known as a ‘Terminal Bonus’ may be declared. The maturity proceeds are the sum of all bonuses, including any terminal bonus, and the sum assured.

The appeal of Traded Endowment Policies is based on the fact that they are backed by the strength and proven performance of leading UK life assurance companies.

Many homeowners in the UK during the 80’s and 90’s purchased endowment policies. They were sometimes called mortgage endowment policies. These policies were a form of insurance and investment savings that would cover the final cost of the home mortgage when it came due. The policy holder would make monthly payments and these payments were to cover their mortgage and provide for some savings.

Despite intentions or promises, investments can vary in end value, and these policies did not come with a guarantee that they would pay out enough to repay the mortgage at the end of the policy term. What’s occurring now is the endowments have a shortfall and cannot pay the owners mortgage payments. In some cases, endowment holders are reporting shortfalls of tens of thousands of pounds.

That has resulted in a lot of stress and disappointment for the policy holders. Many in a state of frustration are surrendering them to the issuing life companies for much less than their value. Life companies include Norwich Union, London Life, Scottish Widows, Prudential Life and many others.

Selling on the Secondary Market

Finance companies have appeared who help find buyers for these policies. Endowment policies can be traded, bought or sold on the open market. A few of the endowment policy trading firms have access to extensive numbers of potential buyers who are looking for the right type of policies to purchase. That means sellers can access buyers who are more interested in their particular policy and that results in a higher price.

Left to their own devices, endowment policy holders don’t have access to the right services. Without a strong base of potential buyers, they’re not likely going to receive the full value of their policy.

What is a Traded Endowment Policy?

Traded endowment policies or TEPs are policies which the original policyholder has sold and that includes the assignment of all future benefits. Endowment policies are long-term and fairly rigid in design. Many policy holders realized that the endowment policies do not meet their changing financial circumstances and goals. They can borrow against the value of the policy as it is considered a viable asset by banks and finance companies. They can also unload the endowment policy by selling them.

Only about a third of all endowment policies reach full term, (e.g., 25 years). Many are or were cancelled within a few years of their conception. That leaves about a third that may reach full term.

Traded Endowment Claims

Endowment policies were sold as a savings instrument that would help to cover long term home mortgages. Many didn’t and won’t and that has resulted in a lot of legal or mis-selling claims and the assurance companies who issued them. Financial services firms are offering to help with the process of policy holders selling their policies. To avoid scams and ripoffs in the UK, you should not sell your policy via any firm that does not adhere to the dictates of the Financial Services Authority’s Mortgage Endowment Department.

There are numerous companies brokering or selling endowments and policyholders are recommended to ensure these companies are governed by the FSA in the UK.

In the UK, the government’s Financial Services Authority has set out guidelines for managing endowment policy complaints and claims. The FSA’s contact address is as follows: Mortgage Endowment Department, The Financial Services Authority, 25 The North Colonnade, Canary Wharf, London E14 5HS.

For many people getting the ideal endowment mortgage can be the cause of a huge worry. But the reality is organizing the absolute best endowment mortgage is not nearly as significant a headache as can be suggested when confronted with it for the first time.

Any good or bad points on your credit report will have a huge effect on the type of mortgage deal available to you. If it’s ever happened that you have run into any headaches with regard to your credit rating you should really try to fix that as now would be the ideal time to fix up any previous headaches with the official history of your credit.

Because of the financial product advertising that you will read on the World Wide Web it’s not difficult to arrive at the idea that almost all of the financial businesses are offering virtually indistinguishable products. But thinking this would be an error as this is absolutely not how things actually are and the truth is that almost all of the institutions and brokers deliver products that will have radically different rules and stipulations

One of the basics that you really ought to keep in mind is what is beyond the highlighted interest rate. In the years ahead the starting interest-rate will become a lot less important than it seems to be right now and it is quite important for your long-term financial health and well-being that you have become part of a deal that contains good terms and conditions. Ultimately, the terms and conditions are the thing that you really ought to be paying attention to.

The companies who provide personal-finance have grown more predisposed towards pushing the concept that there’s absolutely no room for negotiating in the various products they have available. This is certainly not the way things are and a significant percentage of people could be able to save some money if they just made use of the room for negotiating that’s there in products of this type. Lots of people find the finance product marketing information to be quite difficult to decipher and considering the style of the technical speak that is generally presented under these conditions, I can certainly recognize how this can be possible but it’s very important to take advantage of that scope for negotiation to make some real savings.

The business of personal finance has increasingly become more complicated during the last number of years and quite a lot of consumers find a lot of the advertising of financial products to be quite difficult to decipher and given the nature of the technical speak that is often presented in this context, I thoroughly understand how this can be regularity the case.

Once it has become a necessity to get an excellent endowment mortgage, do a little legwork and research because the Internet is an abundant supply of very helpful data when you need to get the best possible endowment mortgage.

To sum up, you hope to be frugal with your endowment mortgage. There are big numbers here and as a by-product the slightest movement in a percentage point will furnish you with large savings.

Recently, many of the UK’s leading insurance companies announced reduced annual bonuses for With Profit Endowment policy holders, yet another blow for homeowners who took out endowments during the 1980s and 1990s, as they will now see increased shortfalls on their mortgage liabilities.

Some of the big names that have declared reduced annual bonuses are Scottish Widows, Friends Provident, Norwich Union and Scottish Life, while some have bucked the trend, and increased payouts – these include Standard Life, Prudential and Legal and General. But unfortunately for many endowment policy holders, payouts are down.

Annual bonus declarations vary from insurance company to insurance company because they are influenced by a number of factors, which include past investment performance, previous bonus announcements and the financial strength of the company.

For example, those who have policies with Scottish Widows, Friends Provident, Norwich Union and Scottish Life will see reduced annual bonuses in 2008 compared with the previous year. Based on a male policy holder with a 25 year endowment policy who was aged 30 when he took out the policy paying 50 per month, a Scottish Widows endowment would see a reduction of 442 between 2007 and 2008.

A Friends Provident policy would see a payout of 37,540 in 2007 reduced to 36,425 in 2008, Norwich Union’s payout would decrease by 2,776 and a Scottish Life policy would decrease by more than 8 per cent – from 37,132 in 2007 to 34,196 in 2008.

Where a policyholders’ endowment continues to under-perform, the insurance company should write to them, warning them of the potential shortfall. However, there are things that can be done to address this potential shortfall before it is too late.

Make a complaint – Many endowment policy holders have successfully won complaints cases against insurance companies because they say the potential risks of endowment were not explained properly to them when they took the policy out. The FSA has more information about endowment complaints.

Surrender – Because of the bad press that endowments have received over the last 10 years or so, many policyholders are trying to get rid of them, and will often just settle for the surrender value offered to them in the hope of cutting their losses and getting back cash.

Sell – There is now a fairly healthy secondhand market for endowments and those who have sold their endowment policy on to an investor have found that they got a lot more than they would have if they had settled for the surrender value – up to 45% in some cases. The reason is, potential investors see endowments as an attractive investment, due to relatively low risk investment strategy and partially guaranteed return.

But the best advice is to get advice; if you are uncertain about what to do, seek independent advice from a specialist.

Life insurances are mostly designed for long term, some of the policies can have refund but some are not, depends on which policy you purchase. For example term life insurance has no cash value, it is designed solely for life protection, upon the maturity the buyer receives no refund, and all the premiums paid will not get back. Whole life insurance has cash value, but it has no maturity, it is a life-long investment.

Some people want to have protection and have saving at the mean time; endowment life insurance is the ideal policy, because the buyer can have not only protection, the maturity of the policy is short, and he also benefits the interest and the full amount premium refund upon maturity.

An ideal plan for saving
The premium of this policy is high but the amount payable is within short term, the policy holder can cash out the money in 10 to 20 years time. This policy provides coverage to the buyer for a specified term and the sum assured is payable to the policyholder along with the entire bonus accumulated upon the maturity of the policy, it is suitable for those who want coverage and at the same time can have big saving.

Different types of Endowment Life Insurance
Endowment plan is categorized as full endowment, modified endowment, low cost endowment and traded endowment; it is advisable to find out which product is suitable for you.

Surrender of policy
In the event of surrendering the policy the buyer can cash in his money earlier, he will receive the surrender value, the payout is determined by the insurance company, and it depends on how much premium paid.

Premium rate
This policy covers the buyer death benefit and has an early maturity, therefore the premium is higher than whole life insurance and the bonus rates lower, and the buyer will receive his premium payments upon maturity. The maturity ranges from 10 years to 35 years, the shorter the period the higher the premium.

Many new clients we meet have one or two unitised with profits endowments in their investment portfolio. Whilst some have decided that there may be better alternatives available for their money after years of falling returns (and questionable prospects), many are hanging on in the belief that things could take a turn for the better.

If you have one or more of these plans, what SHOULD you do?

Indeed, what CAN you do could be one of your main questions.

The reality is that the annual returns on ‘unitised’ with profits investments have been falling for the last 9 years.

NOTE: There are other types of endowment policies including Full Cost Guaranteed, Traditional With Profits and Unit-Linked plans. This article does NOT apply to these plans.

The way in which the unitised with profits plans work is that when your monthly premium is received by the insurance company, a percentage pays for charges and the remainder is split between paying for the life assurance/critical illness insurance and the actual investment.

The investment portion is split between:

- shares

- property

- bonds

- cash

With profits funds were designed to ’smooth out’ the returns of the stockmarket. In years of good returns the insurance company would retain a portion of the profit and pay an annual bonus to your plan.

In years of poor returns the theory is that they would dip into their reserves and pay an annual bonus. Once these bonuses have been paid they cannot be removed.

If the insurance company you have your plan with is not financially strong, it’s likely that they will be investing a higher proportion of your money in fixed interest (bonds) and cash, restricting potential future growth. Over the last 10 years many companies have been increasingly moving the money in their with profits funds towards bonds and cash.

So if the returns on your plan have been falling every year, and more of the money has moved OUT of shares, you don’t have to be a genius to work out that future prospects may not be great.

If the company you are with is financially strong, you’ll be ok, surely?

Maybe not.

Norwich Union is a strong with profits office and they have 43% of the money in their with profits fund invested in shares. Even so, the company predict that only one in ten of their 750,000 endowment policyholders will receive the original target sum at the end of the policy term.

The fund actually returned 10.7% in 2006. Even so, the company has REDUCED payouts on many plans that matured in 2006. They will be further reduced in 2007 by many companies.

Let’s look at some actual payouts for a male aged 29, investing 50 pm over 25 years.

In 1988, Norwich Union paid out 100,247. Not bad for a total investment of 15,000.

By 2006 this figure had fallen to 45,338. In 2007 the figure is 42,133.

If you are with a financially weak provider, such as Scottish mutual and NPI, the situation could be even worse.

The Future

So what options do you have?

Whilst there is no simple answer, as every situation is different, you can:

- continue with the plan and receive the proceeds when it matures

- stop investing into the plan and receive the proceeds when it matures (and perhaps invest the money elsewhere or pay down your mortgage)

- cash in/surrender the plan and invest/pay down

There are pros and cons to all these (such as the loss of life cover) so you really do need to do your research before you take any action.

The Financial Tips Bottom Line

If you do have an endowment plan, please don’t make the mistake of buying your head in the sand and ignoring the facts. For example, if you’re paying 100 pm into a plan with 8 years to run, you’ll be handing the insurance company 9,600.

Find out what the best option is for YOU, and have the peace of mind that you’ve made the right decision.