Smart Thinking... The price of protection
Traded endowments
Another investment with a built-in guarantee is the traded endowment policy (TEP). Endowments have fallen out of favour with investors in recent years, as insurance companies admitted many of the schemes sold to pay off mortgages would not reach their investment targets.However, this does not reduce the attractions of policies traded on the second-hand market. “Many commentators expect maturity values of endowment policies to fall further,” says David Faram of Beale Dobie, a firm that trades second-hand endowments.
“This may cause concern to endowment policy holders, but what investors may not realise is that market-makers build in a significant reduction in maturity values when determining the selling price.”
Traded endowments have become popular among cautious investors over the past year because they offer high levels of capital protection. You not only get the basic sum assured but also the annual bonuses to date, which typically exceed the cost of the policy. In addition, you also benefit from any future bonus, although this will typically be at a much lower level than in the past. And remember, you also have to pay the monthly premiums.
One TEP Beale Dobie was offering for sale from Windsor Life during June, for example, had a sum assured of £22,750 and a current bonus of £25,008. Despite this guaranteed return of £47,758, the plan, which has a further 4.5 years to run and £5,200 of premiums due, is for sale at £42,226.
“People are looking at traded endowments in a different way now from the way they did two to three years ago,” says Faram. “Most of the policies we have on offer have a capital guarantee of at least 95 per cent plus the opportunity for extra bonuses. That is an attractive proposition for cautious investors.”
Some thoughts on Structured Products
What exactly should you look out for when investing in a structured product? We asked Kerry Nelson of Willis Owen independent financial adviser, to explain her criteria for picking suitable schemes.1. What index does it cover?
Nelson says:“If you are a cautious investor you should be looking for a scheme that covers one of the world’s main stock market indices, such as the FTSE 100 or S&P 500.
If you are prepared to take a more risky approach, you may feel comfortable mixing exposure to one of these major indices with exposure to a more aggressive index, such as the Eurostoxx 50. Beware, however, of products that link returns
solely
to a more exotic index, as returns from these markets are likely to be more volatile.”2. Capital protection.
“Read the small printto find out how much protection there is for your capital. Schemes that protect 100 per cent of your money regardless of the circumstances are the safest, but if you are prepared for some loss you may feel comfortable risking up to 50 per cent of your capital.”