I worked for 6 years for a TEP market maker. I wrote the valuation system they still use today (4 years on), I know this as I am still a close friend of the Managing Director and still get asked to modify it.
TEPs can be an excellent investment, despite the general bad press about endowment policies. There is nothing wrong with an endowment policy as an investment, it is only when they are missold and misunderstood that they are bad. Endowments are LONG TERM investments as they are structured that way. In fact, most of the value of the policy is paid in a huge "Terminal Bonus" at maturity, which can be very high like 40% of policy's current value at maturity. Some life offices pay meagre year on year bonuses, but 140% on maturity. If you buy one, you should buy it planning to take it to maturity.
How to spot a good one:
Ask the market maker for a "Policy Information Schedule" this usually lists the numbers below quite clearly
One indicator of good value is where the 'Locked in Value' exceeds the sale price plus future premiums.
The Locked In Vaue is the "Sum assured" (guaranteed minimum amount payable on maturity) plus the "Accrued Bonuses" (these are the cumulation of annual bonuses - these are reversionary bonuses that once paid are guaranteed on maturity). If both these numbers plus all the future premiums add up to more than the sale price today, you are guaranteed to make a profit (i don't know how rampant inflation would affect this - perhaps annual bonuses would increase a lot too). Believe it or not these policies do exist. The bonuses paid every year are variable and can be small (even 0%, VERY VERY unlikely, except in Equitable Life's case!) when life offices hit hard times, so you can't count on them. Any market maker will be able to give you a Policy Information Schedule that will show you the history of bonus rates for the particular company that isssued the policy. This schedule will also include figure on how your return would be affected by bonus rate cuts/increases of -20% to +20%.
You should be careful when depending on bonuses. Check how much of the policy's maturity value depends on the last "Terminal Bonus". This is a large one off payment at the end of the policy and is also variable, according to life office profits in that year.
Another indicator is the "Sale Price Return To Date". This is the return to the original investor (you are buying a second hand policy) if you paid them the sale price for the policy. If this is low so far, and you think over the life of the policy that the return will increase, then the policy is likely to make money. Policies taken out for 25 years (typical - most attempted to cover mortgages) in say 1985 might have achieved 9% return. Policies taken out recently would be achieving much less currently, but will that return rise to a more historically correct average?
If both these indicators are favourable, chances are you found a bargain.
Policies which mature further in the future generally offer better value. The market makers find these difficult to sell (except to funds) as most investors (fools) want a quick return. Market makers price long term policies cheaper. By long term i mean maturing 5 years or more in the future, the further in the future the more value you get. Market makers price the policy by assuming that the level at which last year's bonuses were paid will continue to be paid until the end of the policy. The value they get they call the Future/Formula Maturity Value (FMV). The FSA will not allow market makers to disclose this to the general public, as joe public will often assume that a number written on a piece of paper is fact rather than projection. However, we would provide this to persistently aggravating customers who just keep asking for it. We just wanted the sale. Shhhhhh don't tell anyone. You can work it out yourself fairly easily from the information they give anyway. If you ask them how to work it out, they will tell you, as this is not against regulations. It's a farce in other words.
They then use the FMV (assumed maturity value) to price the policy so that it would offer a particular return if that were true. This "reckoned" return they call the Pricing Discount Rate or PDR. Short term policies would be priced say 9% PDR (potential return). Longer term ones up to 13% PDR. High PDR = lower sale price. If bonuses actually rise long term, you will do better than the PDR. If they fall, will do less well. I have seen short term policies (1-2 years from maturity) sold at 9% PDR mature with an actual return of -10%. This was because the bonus rates that life offices paid were slashed along with interest rates, and short term policy projections rely heavily on the Terminal Bonus paid at maturity, and so are highly susceptible to rate cuts. I assume (I don't know) that if interest rates rise, so will bonuses again, with a lag. The FSA won't let the market makers call the PDR a "return" because it is not a return, but an assumed return, given certain assumptions.
The end of the year is a less clever time to purchase a policy. Market makers price conservatively and build in lots of profit as their stock could be devalued significantly by a bonus rate cuts. Makers makers buy the policy from the original policyholder and keep it in stock, paying the premiums as they go. This stock could be a liability, so from about November they offer less to buy policies and price in more profit. Once bonus rates are announced, things return to normal. Bonus rate announcements are made on the 31st December. Standard Life make theirs on the 11th November however. Check with the market maker/life office if they have announced yet.
Another upside(?) is that an endowment policy includes life insurance on the original policy holder. This insurance is passed to you, so if the client dies early, you get the payout, which can significantly increase your returns. On request, market makers will give you contact details for someone who can confirm the original policyholder isn't dead yet, if you have the stomach. Just don't shout "woohoooooo!" - someone just died.
This feature has spawned another breed of market maker. They buy policies from the terminally ill. They require a doctor's certificate which gives an estimate on the time of their future death. They then price the policy according to the return gained if the policyholder dies at that time. They then sell the policy as if that return is certain. Pretty sick if you ask me, but still another possible investment for the soulless. The market makers argue that the extra cash at least gives the patient good quality of (remaining) life.
Finally, NEVER pay what the market makers asks for. They ALWAYS factor in a 3% (sometimes 5% on the difficult to sell policies) commission for IFAs (your faith in IFA's is well placed in my experience, as they make huge commissions in TEPs). When selling to the public direct the market maker will try to keep this commission. Tell them that you know this and they will drop the price immediately, no skin off their nose really, they already factored in losing it. The sale is more important, and due to bad press, market makers are struggling. NEVER PAY THE SALE PRICE.
Market makers can be found advertising in the financial pages of the Daily (spit) Mail (spit) financial section a lot.
The Association of Policy Market Makers : www.apmm.org is a self-run group of some of them.
I worked for: www.neville-james.co.uk
Beale Dobie, Policy Plus, Policy Portfolio are others. Any will happily provide you with a sales list and a Policy Information Schedule for any paricular policy on that list.
Apologies for the long post, I could go on. I hope it's understandable to someone unfamiliar with the terms. Any other questions, feel free to ask, it's nice to feel that my experience could help someone.
I am a computer programmer, not qualified to give financial advice. So please treat my post with extreme caution. But having single-handedly written the systems to price these policies, including the system which prices Neville James' £80m With Profit Plus fund, I do have some valid experience in this particular market. ALWAYS DO YOUR OWN RESEARCH and try to pick holes. An IFA is the "safe" route, but not many of them actually understand this market at all. They just rely on market makers' figures and advice. Some of the questions which IFA's asked me on Tax issues over the phone were just UNBELIEVABLE. Most of the questions were based around whether I would alter the system "slightly" to hide the commission from the client. This is illegal and immoral. We never did that.