Many investors are understandably reviewing their attitudes towards investment risk and return after the global financial crisis. However, with interest rates low, it is not easy to achieve competitive, low risk, low volatility returns.
Traded endowment policies (known as TEPs) offer these attributes, yet are not widely known or understood. A
TEP is simply an endowment policy that has been sold by its original owner through a trading platform such as the Life Insurance Policy Exchange (LIPE).
Typically, endowment policies have been used for long-term savings. Policyholders may choose, however, to sell their policies before the agreed maturity date. Rather than surrendering the policy back to the insurance company from which it was purchased, in which case the policy is cancelled, a policy holder can choose to sell the policy to LIPE. The policy continues, albeit with a different owner, and the benefit of accumulated bonuses remain.
Policy holders can receive a significantly better return for their policy by selling it to LIPE, rather than surrendering it.
The appeal of this type of investment is that in most cases the value of the investment is already guaranteed by the bonus structure of the underlying policy. In addition, because it is an insurance policy, any gains are tax paid. This is particularly beneficial for investors on a high marginal tax rate.
Currently, TEPs are offering a projected yield of 5.36 per cent to 5.95 per cent tax paid.
One of the quirks of traded endowment policies is that the original life insured by the policy remains the life insured. In the event, therefore, that the original life insured dies before the policy matures, the owner of the policy is entitled to an early payout, thus further increasing the yield. For obvious reasons, the name of the life insured is not revealed to the investor.
Liz Koh is a financial adviser.
Her disclosure statement can be obtained free of charge by calling 0800 273 847.
www.moneymax.co.nz
