Second-Hand Endowment Policies

In Europe, there is an active market in the purchase and sale of Traded Endowment Policies, called TEPs. These life insurance products are also referred to as second-hand policies, when sold by the original owner to an investor. Endowment policies require regular premium payments that, together with accrued interest, will equal the specified face amount at a specific future date or in the event of earlier death.

Function

TEPs offer investors potentially high returns at low risk. Buyers are assured of recovering at least the original face amount and any added values already accrued at time of purchase, assuming they continue the scheduled premium deposits to maturity. Generally favorable taxation adds value to these investments.

Features

Second-hand endowments are bundled together and sold as securities, mostly to institutional buyers, such as banks, pensions and hedge funds. Prospective investors are mainly concerned with the future direction of interest rates, which can impact the profitability of these investments.

Considerations

The original policy owner, when circumstances have changed, has an alternative to simply surrendering his contract to the insurance company. There is an active market to trade life insurance products as investments. He may receive a higher price from buyers who want to trade for the future value of his policy, rather than from its surrender value.

References

• UKCityMedia
• Financial Times: Insurance
• South African Institute of Chartered Accountants