Key Features of TEP's.
With profit endowment policies managed by a life assurance company will pay a guaranteed sum at the end of a fixed term. This is known as the amount assured and is determined by the contract providing that the premiums have been paid.
The final amount will include any profits accumulated during investment. These profits are declared annually and are paid to the assured person when the contract is finished.
In the event of death by the policy holder, the money will be paid directly to the policy holders estate. (Next of kin).
Policy premiums are normally paid for monthly. The life assurance companies use most of this money to invest and then share the profits with their policy holders each year. In effect, the policy holder is taking a share of the life assurance companies profits from wise investments
Bonuses are as follows:
Reversionary Bonuses:
Reversionary bonuses are declared annually as cash values computed as percentages of the basic sum assured and of bonuses declared in previous years. Once granted, these bonuses are guaranteed, cannot be withdrawn and are also known as attaching bonuses.
Special Bonuses:
Reversionary bonuses are one-off bonuses, granted at the discretion of the life company and are also guaranteed. For example, if a friendly society converts to a public company they may grant such special bonuses to each policy in force, instead of issuing free shares in the new company.
Terminal Bonuses:
Most life companies currently grant an additional bonus at the end of the life of a policy. In essence this is a loyalty bonus designed to encourage the policy holders to keep the policies in force until the maturity date. The size of the terminal bonus is dependent upon the investment conditions prevailing at the time of maturity, as well as upon the investment performance of the life company. Although it can be a large part of the final sum paid out, it is not guaranteed.
Bonuses issued by any life company are dependent upon its financial strength which, in turn, relies heavily on its investment performance.
It is in the interests of the life companies to even out the vagaries of the investment environment, by declaring bonuses which are reasonably consistent. However, bonuses may be increased or decreased from year to year, thereby affecting the final value of the underlying policy.
What are TEP's ?
Traded Endowment Policies or TEPs are old, second hand with-profits endowment policies, as described above, legally assigned to new owners who pay the purchase price and take over the payment of future premiums. The life assurance cover remains on the original life/lives assured, but all policy benefits on maturity or, an earlier life assurance payout, are the property of the new owner.
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.
The Basic Sum Assured remains constant throughout the term of the policy and is paid on maturity or earlier if the original life assured dies. In addition bonuses are added to the policy every year and once added they cannot be reduced or taken away. The existing annual (or reversionary) bonuses together with the basic sum assured when the policy is purchased constitute the guaranteed value which is often higher than the purchase price of the TEP, meaning that, provided the policy is kept through to maturity, the new purchaser cannot suffer a financial loss.
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