Never heard of Traded Endowment Policies anymore.
Around 2007, Traded Endowment Policies were aggressively marketed to many investors. Today, we seldom hear of anyone marketing such products anymore. No prize for guessing why.
Traded Endowment Policies are just regular premium insurance endowment policies. These endowments have cash values and maturity values. All Traded Endowment Policies are "participating" meaning that there will be future bonuses - only the question is what will to be bonus amount.
There was a market for the Traded Endowment Policies because original owners of such policies would like to sell it away. Instead of surrendering these policies to the insurer, these owners sells it in the open market because the selling prices were better. The buyer hopes that the initial investment plus the regular commitment for its premium will yield good returns.
In Singapore, the most common Traded Endowment Policies were from United Kingdom. It was aggressively marketed as something "safe." Most firms did not permit financial advisers to market the Traded Endowment Policies due to the conflict of interest – the seller of the policy is effectively “surrendering” his own life policy. Hence, the Traded Endowment Policies were marketed by non-financial advisory companies. In fact, I remember a particular person aggressively soliciting individuals in an internet forum to buy the Traded Endowment Policies from him. One of the selling points which he often mentioned was that if the insurer goes belly up, 90% of the cash value is protected by the British government. Personally, I have always disliked this form of marketing because of lack of full disclosure.
Here were some risks that were not properly disclosed:
- These Traded Endowment Policies are denominated in British pound (a foreign currency). The foreign currency risk of the British pound is not insignificant. The product was marketed as something "safe” which is not correct.
- The market values of these Traded Endowment Policies were actually correlated with the equity and bond markets. What do I mean? The correlation of these Traded Endowment Policies with the market's performance is due to the fact that the underlying investments were merely a balanced fund investing in fixed income and equities.
So how have these Traded Endowment Policies performed since 2007? There is one particular fund which invests in UK’s Traded Endowment Policies. Because it is a fund, there is a historical published values. Below is the chart showing the performance of the fund.
The blue line shows the performance of the fund in Singapore dollar. It appears it never even recovered from the financial crisis! But if you look at the red line – which is the value of the pound measured in Singapore dollar, you will find that the massive loss of the fund is due to foreign currency lost. Is the Traded Endowment Policies a "safe" product? Of course not. This being said, there is nothing wrong with this product per se. But the manner it was marketed as something 'safe' was wrong. The lesson is this: it is important to be careful whom you buy products from.
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