There�s life in the old dog yet!

- Life Insurance Policy Exchange


For over 15 years Life Insurance Policy Exchange Limited (“Policy Exchange”) has been promoting the virtues of Traded Endowment Policies (“TEPs”). Throughout this period TEPs have proved to be a consistent performer offering investors both Capital Security and good tax paid returns.

The current climate has seen a massive flight of investor funds towards quality fixed interest product, and it is therefore timely to review the unique qualities offered by Traded Endowment Policies, and to see why there’s life in the old traditional policy dog yet.

What are Traded Endowment Policies?

Traded Endowment Policies are fixed term investments offered on the Policy Trading Market. This market was established by Policy Exchange in New Zealand in 1994 and since then over $60 million has been invested in TEPs.

How does the Policy Trading Market work?

Policy Exchange acquires traditional whole of life and endowment life insurance policies from policyholders who need cash or income prior to the policy maturity date.

Policies are then transferred into the name of a custodial company by formal registration with the relevant insurer. The registration process ensures that all the entitlements and benefits under the policy pass from the original policyholder to the new investor. At the same time, the policy is converted to a shorter duration of, typically, 5 years.

Finally, Policy Exchange makes each TEP available via a weekly stocklist of policies for sale.

What makes TEPs an Attractive Investment?

Capital Security:

The underlying contract of insurance guarantees the payment of a fixed sum (known as the sum insured) at a known future date. In addition, at the date of purchase, a TEP will include an amount made up of prior allocated bonuses which are also guaranteed to be paid at the same future date.

Added together, the sum insured and prior allocated bonuses make up the ‘Locked In’ Maturity Value. This is an amount the underlying insurer is obligated to pay out at maturity. A key indicator of the strength of these obligations is the Insurer Financial Strength Rating provided by international ratings agencies such as Standard & Poors and A.M. Best. Current ratings are shown in the table below.



In almost all cases, the ‘Locked In’ Maturity Value will be more than the investment amount, providing investors with 100% Capital Security.

This has been a significant selling point for investors in the current climate.

Competitive Forecast Returns:

Endowment policies are entitled to receive a share of future profits from the insurer’s Main Fund.  These are declared each year as bonuses. As described earlier, bonuses that have already been declared by the life company become locked in and can’t be taken away.

As the ‘Locked In’ Maturity Value may represent more than 100% of the investment amount, so there is a ‘Locked In’ return component. Nevertheless, a significant portion of an investor’s return is dependant on future bonus payouts by the life company.

Policy Exchange calculates the Estimated Maturity Value for each policy based on the current bonus rates applicable to that contract. Whilst there is no guarantee in regards to the level of future bonus payouts by the life company, Policy Exchange has limited the downside effect by building a buffer into each policy. Under the Premier Option, if future bonus rates were to fall, Policy Exchange’s buffer is the first to be effected, and the investor’s return is relatively insulated. Conversely, if bonus rates were to increase, so the investors return will increase above the offered rate.

The weekly stocklist details for each policy the net Estimated Maturity Value, after accounting for the buffer, as well as the forecast tax paid return. The offered return will vary from policy to policy (5.00% - 6.50% Tax Paid), and takes into account the underlying Capital Guaranteed Ratio. Thus investors can select a mix of capital security and return suited to their needs.

Example

The following policy provides an example of a policy that offers good Capital Guarantee Ratios and an overall return that is mid range in terms of the rates on offer.

How do I make an Investment in TEPs?

Simply call NZIJ on 0800 90 60 90 or 04 499 3592 to obtain the current Policy Exchange list of available policies.

Select off the list the item that you want then call us to reserve in your name. Policy Exchange will issue the settlement documentation, which is required to be returned along with your cheque by the stated settlement date.

An Investment Guide, product summary for the Premier Option, and Insurer Ratings Scales are also available on request.