Traded Endowment Policies (TEPs)
TEPs are investment-backed life insurance policies that have been acquired from the original policyholder by Policy Exchange, and then made available for investment. They remain at all times an issuance of the original life company - e.g. AMP Life.
These investment-backed policies share the following core features:
Projected Tax-Free Return
- Offered returns differ from policy to policy and currently range from: 1.64%* to 3.51%* Tax Free.
- All offered returns are projections, dependant on the level of future bonuses (or earnings) declared and allotted to a policy each year by the life company. At the date of investment policies carry 2 maturity value projections. A maturity value based on the prevailing declared bonus rates, and a ‘low’ maturity value that is generally 80% of the prevailing rates. Currently, Policy Exchange is offering all policies for sale against the more conservative ‘low’ maturity value projection.
- More information about bonus rates and returns are detailed under ‘Bonus Rate Assumptions’ below.
- * These are the current retail rates on offer. For the top tax rate of 39c applying from 1st April 2021 these translate to pre-tax equivalent returns of 2.68% to 5.75%p.a. Higher rates may be available for investments over $100,000.
- Each policy has its own fixed maturity date: Durations typically range from 4 to 10 years.
‘Locked In’ Maturity Value
- Each policy includes an amount payable at maturity that is a fixed contractual obligation of the issuing life company.
- Referred to as the ‘Locked In’ Maturity Value, this differs from policy to policy, and typically range from 80% to 100%+ of the amount invested.
Bonus Rate Assumptions
As stated, policy returns are by way of future bonus allocations. These are added to the ‘Locked In’ Maturity Value by the life company either annually, or at maturity, or for most policies usually both.
Bonus rates are set by the life company each year, and are generally described as ‘predictable’ since life companies take a long-term view of underlying investment performance when setting these rates.
Nevertheless, in order to further improve earnings predictability, Policy Exchange is currently basing the investors payout on the ‘low’ maturity value projection. Under this pricing structure Policy Exchange retains an interest in the policy for the remaining 20%.
However, rather than future bonuses being shared 80:20 on a pro-rata basis, Policy Exchange assumes the first tier of risk associated with bonus rates falling. In other words, an investor’s return would only be affected if maturity payout from the life company was less than the ‘low’ maturity value projection as at the investment date.
All Traded Endowment Policies share the same ‘issuer risk’; that relating to the underlying life insurance company. Investors want to know the life company has the ability to meet its obligations to policyholders as they fall due. A key yardstick is the Insurer Financial Strength Rating which the Reserve Bank requires all life insurance companies in New Zealand to hold. This is an independent assessment provided by approved international ratings agencies. AMP Life, for example, currently hold an A- “Strong” Insurer Financial Strength Rating from Standard & Poors.
At an individual policy level, risks differ. Each policy has its own underlying ‘Locked In’ Maturity Value, and this reflects how much of the purchase price is secured by this fixed contractual obligation of the life company. It is the level of ‘Locked In’ Maturity Value that Policy Exchange references when setting the offered return. The lower the ‘Locked In’ Maturity Value as a percentage of the policy purchase price, the higher the relative risk, and therefore the higher the offered projected return.
Here’s 3 examples taken off the Sample Stocklist.
- Policy Exchange item number: 4279
- Purchase price: $29,394.62
- Annual premium due: Nil
- 'Locked In' Maturity Value - $: $22,675.00
- 'Locked In' Maturity Value - %: 77%
- Offerer Projected Tax-Free Return based on the ‘low’ maturity value projection: 2.73%
- Policy Exchange item number: 4289
- Purchase price: $54,469.71
- Annual premium due: Nil
- 'Locked In' Maturity Value - $: $49,063.00
- 'Locked In' Maturity Value - %: 90%
- Offerer Projected Tax-Free Return based on the ‘low’ maturity value projection: 2.16%
- Policy Exchange item number: 4284
- Purchase price: $85,119.84
- Annual premium due: $3,220 x 7yrs
- 'Locked In' Maturity Value - $: $107,655.50
- 'Locked In' Maturity Value - %: 100%
- Offerer Projected Tax-Free Return based on the ‘low’ maturity value projection: 1.62%
This standardised risk/return approach is taken across all policies made available for investment. All these details are made available on the weekly stocklist of policies for sale, and investors can select policies to meet their preferred mix of security and return.
It is important to note, that all 3 policies enjoy the same benefit of the bonus rate buffer offered by Policy Exchange. In other words, an investor’s return will not be affected if the payout at maturity remains above the ‘low’ maturity value projection.
About Policy Exchange
Since 1995 Policy Exchange (www.policyexchange.co.nz/teps/) has been New Zealand’s only trader of investment-backed endowment and whole of life insurance policies. It currently administers close to $20.0m** of these policies on behalf of private individuals and trusts, in conjunction with the appointed asset custodian Covenant Trustee Services Limited.
Policy Exchange is offering opportunities to invest in individual policies, or bespoke tailored portfolios of policies with minimum combined investment values of $100,000.
** Based on total forecast maturity values
- Policy Exchange is the trade name of Life Insurance Policy Exchange Limited, a registered Financial Service Provider [FSP 16342]. It is a member of Financial Services Complaints Limited and operates independently of all life insurance companies.
- Policy Exchange is not the issuer of a TEP investment. Its primary function is to source policies from people who require cash from their policy, and then make them available for investment. The strength of investment and in particular the underlying ‘Locked In’ Maturity Value, is by of reference to the issuing life company solely.
We invite you to take a closer look at this unique investment option. If you wish to invest or would like more information, Register Interest, and we’ll put you in touch with Policy Exchange.