Tax free fixed term investments for sophisticated investors
Covered in this blog...
In the current low interest environment many investors are looking for ways to add value to their fixed interest portfolio. For investors of $250,000 or more, Traded Endowment Policies (TEPs) are a unique alternative with the ability to design a portfolio specific to your requirements regarding duration, capital security and timing of cashflow.
Traded Endowment Policies (TEPs) explained
Having been available in New Zealand for over 20 years, TEPs are a traded security: investment-backed life insurance policies. The underlying life insurance policy has a much longer history both here and overseas, with the first of its type sold over 100 years ago.
The trading platform for these policies is operated by Life Insurance Policy Exchange Limited (Policy Exchange). The original policyholder, who for various financial reasons has needed to exit their policy, sells the policy to Policy Exchange for the best available price, and Policy Exchange then makes it available for investment.
What are you investing in?
These older-style investment-backed life insurance policy contracts are commonly referred to as ‘bundled’ policies, as they combine insurance and investment into one product. While this style of policy is no longer offered by the life companies, there are still many thousands of previously issued policies still in-force today.
Unlike pure term life policies, which pay out only on death of the life insured, due to the underlying investment component of these bundled policies they carry both a discounted cash value plus a forecast maturity value (representing the full face value of the policy) payable at a fixed future date. At any time over the life of the policy a policyholder can choose to exit for the cash value. Due to changing circumstances, many policyholders do exit and in doing so forego entitlement to the full value of the policy, payable at maturity. Policy Exchange purchases these policies and makes them available for investment over its trading platform.
It is the policy’s maturity value payable at a fixed future date that the new owner of the policy invests in.
What makes up a bundled Life Insurance policy?
Each policy has three components:
- Sum Insured - the amount guaranteed to be paid at maturity by the life insurance company
- Accumulated Annual Bonuses – annual bonuses allocated by the life insurance company, which are permanent additions to the policy and payable in full at maturity
- Future Forecast Bonuses – future forecast annual bonuses, plus a forecast terminal bonus payable at the maturity date, both based on the bonus rates set each year by the life insurance company
As with all life policies there is the requirement to pay premiums. However, with TEP investments premiums have been paid in advance by Policy Exchange, so an investor simply makes a single upfront payment to purchase a policy with no ongoing obligation to pay premiums.
How do the components impact the TEP investment?
Each policy is different, and will have been in force for 15-35 years prior to the original policyholder selling it over the Policy Exchange platform. In addition to policy age, the initial size of the policy has a bearing on the value of the TEP investment.
The following key information is provided for each TEP
|Issuer||The life insurance company which issued the policy, and whom the investor ultimately looks to when assessing the risk profile of the investment.|
|Maturity Date||The maturity date of each TEP investment; ranging from 4-15 years.|
|'Locked In' Maturity Value||The sum of the Sum Insured and prior Accumulated Annual Bonuses, reflecting the minimum amount the life insurance company will payout at maturity.|
|Forecast Maturity Value||The sum of the ‘Locked In’ Maturity Value and Forecast Future Bonuses, reflecting the forecast amount the life insurance company will payout at maturity.|
|Purchase Price||The purchase price per policy.|
|Forecast Tax Free Return||The forecast Tax Free Return.|
|Pre-tax Equivalent Return||The pre-tax equivalent returns for 33c, 30, and 28c taxpayers.|
Policy Exchange works with the investor to firstly understand their requirements, then tailors product to match those requirements as closely as possible.
Who Invests in TEPs?
Providing tax free returns, TEPs are naturally advantageous to investors on marginal tax rates of 33c, 30, and 28c. Typical investors are 5-10 years from retirement and looking to rebalance their investment portfolio towards lower risk investments. TEPs also appeal to retirees wanting lower risk investments though not requiring an ongoing income stream, and to trustees of family trusts looking for superior returns to bank deposit rates.
Some investors may hold several TEP investments maturing at different times (commonly referred to a laddering) to match future cash requirements. Policy Exchange can tailor a portfolio of TEP investments to match future needs. Terms are negotiable for TEP portfolios of $250,000 or more.
Secure Trading Platform
Investors can take comfort that all investments are transacted through a 3rd party professional custodian, Covenant Trustee Services Limited. Covenant receive the initial funds and also receive and disburse the policy proceeds at maturity. Covenant holds the policy document on behalf of the investor over the life of the investment.
Policy Exchange does not handle client monies in its own capacity.
Solid Risk profile
With TEPs your money is invested in an investment-based life insurance policy issued by well-established and highly rated life insurance companies such as AMP Life Limited and Sovereign Life.
While Policy Exchange and Covenant provide the platform to sell adn purchase these policies, to determine the risk profile of the TEP investment it is the original issuer (life insurance company) that investors should look to.
For more detail regarding capital security and returns for a Traded Endowment Policy Investment, feel free to visit the investment landing page on the Policy Exchange website.
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This article is a guest blog provided by Policy Exchange to provide information on their products.