To profit, turn on the Tep

Traded endowment policies

The second-hand market in with-profits endowment policies may be more than 150 years old, yet few policyholders have even heard of it. Today the traded endowment policy (Tep) market is only worth between £450m and £470m, which is a drop in the ocean considering that some £1.25bn-worth of endowment policies were surrendered last year.

The second-hand market in with-profits endowment policies may be more than 150 years old, yet few policyholders have even heard of it. Today the traded endowment policy (Tep) market is only worth between £450m and £470m, which is a drop in the ocean considering that some £1.25bn-worth of endowment policies were surrendered last year.

An estimated 750,000 endowments are sold each year, generally alongside interest-only mortgages. They are investment vehicles issued by life assurance companies, which agree to pay a fixed sum plus accumulated profits on an agreed date. This is usually between 10 and 25 years, provided all premiums are paid.

Sometimes, though, policy-holders may wish to cash in their endowment early. Most people tend to surrender their policies to the life insurer, and are penalised for breaking the terms of their initial contract. They receive a sum back but it is generally considerably less than the policy is really worth.

By selling through the Tep market, policyholders get a better price because the endowment is taken over, rather than surrendered, so they are not severely penalised. Rather than surrendering your policy to the insurer you bought it from, you can get returns that are typically 15 per cent higher.

So why doesn't every endow- ment holder consider the second-hand market? "Sometimes it is ignorance that stops policyholders using the Tep market," says Brian Goldstein, managing director of Policy Portfolio, founder of the Tep market. "Many people just don't know that they have another option. Some of the life companies don't advise customers that we even exist."

Policy Portfolio, like other market makers, will come back with an offer for your endowment. "We say we will give [policy holders] more than their insurer offers them if we can; if not, they should go back to the insurer," says Mr Goldstein.

In the Tep market, buyers pay a purchase price for the policy, plus legal fees, and the premiums until the policy expires. When the endowment matures, they receive the full surrender value.

It is an attractive investment for buyers because they acquire a mid-term policy with attaching bonuses, which may give a good return with limited risk. They also don't have to pay hefty commission and admin-istration costs, which come with setting up an endowment policy from scratch.

Market makers provide estimates based on previous history, prevailing market conditions and expectations of future conditions. It can be difficult to know whether estimated maturity proceeds are realistic, as was shown recently when many policy holders received letters suggesting their endowments might fall short of projected value.

Not all endowments are attractive to buyers, either. Only those policies that are "with-profits" - meaning they generate annual bonuses - and have several years left to run are sought by brokers.

Teps can be bought from a broker or through internet auctions. There are several funds available: two from Barclays Global Investors, two from Kleinwort Benson and one from Scottish Value Management.

* Contacts: for a free factsheet, 'Teps and Tax', call Policy Portfolio on 020 8343 4567; www.policyportfolio.co.uk