Traded Endowment Policies
A Traded Endowment Policy (TEP) is an endowment policy that the original policyholder has sold by absolute assignment of all future benefits. "Traded Endowment" is merely a fancy way of saying second-hand endowment policy.
Endowment policies are long-term and relatively inflexible by their nature. Many people have found that these policies do not suit changing financial needs or circumstances.
Example- If you took out a 25-year policy but after, say 15 years, decide you no longer need / want the long-term savings plan or it has not performed as you expected, you have a number of options:
- Selling to a third party in the second-hand market - the TEP market
- Making the policy paid-up
- Borrowing against the policy
- Surrendering the policy to the life assurance company you purchased it from
For a variety of reasons, many policyholders cash in their policies early. According to the Association of Policy Market Makers only around 30% of all endowment policies actually reach maturity. A further 30% are cancelled in the first few years of their intended lifespan. The 40% that neither last the full term nor get cancelled are either sold or surrendered somewhere along the way.
Why would I sell my policy rather than surrender it?
For the obvious reason! You may have decided, for whatever reason, that your endowment policy is no longer relevant to your financial circumstances. It follows logically that you will, therefore, want to get as big a return from your investment into the endowment policy as you possibly can.
First you should approach your life assurance company to find out how much the policy will be worth if you surrender it. This "surrender value" may or may not be more than you have actually paid in to the policy. Indeed, you may be unpleasantly surprised by how low this is.
Endowment policies generally take approximately 5-7 years before their cash-in values match, and then exceed, the amounts of money invested, although this performance cannot be guaranteed. You may well be familiar with the press coverage about why this is so - commissions to the sales people, administration charges, fund management costs etc. The key point is that long-term contracts rarely offer especially attractive short-term encashment values.
This is where the traded endowment policy (TEP) market may help. There may be a substantial difference between a quoted surrender value and a policy's underlying worth if held to maturity. Through the TEP market, policyholders may be able to sell 'unwanted' policies and buyers with the initial capital to invest and the income to meet future regular premium commitments may buy them mid-term with entitlement to all the potential future benefits.
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