A Traded Endowment Policy (TEP) is a traditional with-profits endowment plan that the original policyholder has sold in the TEP market (to a market-maker) at a price greater than the surrender value offered by the insurance company.
The surrender values quoted by many life offices often do not fully reflect the true value of the policy as a continuing contract, as such, many investors recognise that such policies represent a low to medium risk investment opportunity and are willing to offer for more than the surrender value.
The new owner takes over the payment of future premiums and at maturity of the policy or death of the original life assured, receives all benefits from the policy.
This trade is partially governed by a trade body, The Association of Policy Market Maker.
TEP can offer a more attractive rate of return than fixed interest government bonds and is less volatile than a direct investment in shares.
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.
These bonuses, once declared, cannot be taken away.
The sum assured and bonuses declared constitute the 'locked-in value'.
In many cases the 'locked-in value' contained within the policies are greater than the prices paid, illustrating the low-risk nature of Traded Endowment Policies as an investment.
Finally on maturity, a further bonus known as a 'Terminal Bonus' may be declared.
The maturity proceeds are the sum of all bonuses, including any terminal bonus, and the sum assured.
The appeal of Traded Endowment Policies is based on the fact that they are backed by the strength and proven performance of leading UK life assurance companies.