The insurance company running the endowment policy pays income tax and capital gains tax on the underlying fund, but the proceeds of the policy are not generally subject to tax in the hands of the original policyholder.
However, without going into tiresome detail about the different rules for "qualifying", "non-qualifying" and "paid-up" policies, suffice to say that the policy proceeds are subject to capital gains tax (CGT) in the hands of a purchaser. Yet since most of us do not use up our capital gains tax allowance, much of the policy gains can usually be sheltered within the annual CGT allowance.
When you buy a TEP you are not just taking a punt on the markets but also on the generosity of the insurance company which runs the policy. What the round of bonus declarations last month has reinforced is the continuing swing from annual bonuses to terminal bonuses.
That is to say, more of the final maturity value - already around a third or more - of the endowment policy is coming from the terminal bonus. It is a way for the insurance companies to offer fewer hostages to fortune over the term of the policy.
But it does mean a larger hostage to fortune on the part of the policyholder or second-hand purchaser. However, that caveat aside, it is hard to argue with statistics showing maturing second-hand endowment policies offering double-digit annual returns.
So where can we find such policies on the web? A number of TEP market- makers have websites, which vary in content and usefulness from the rather bare offering from Beale Dobie - which appears to consist solely of the home page and a page of its office addresses and telephone numbers - to others which include explanatory guides and price lists of available policies.
Absolute Assigned Policies Ltd (AAP), for example, is the appointed policy supplier to the BZW Endowment Fund, a pounds 25m publicly quoted endowment- policy investment fund, which is managed by Barclays Global Investors. AAP's website offers potential TEP purchasers the ability to specify investment requirements by filling in an e-mail form. Sellers may also e-mail from the site, requesting a standard valuation form - policy valuations are free and without obligation.
Neville James is another market-maker which includes a price list of policies on its website. SurrendaLink does not have a list of policies on its site but dangles the enticing prospect of a possible return for policy sellers in excess of 40 per cent above the insurance company's quoted surrender value.
You cannot buy a TEP on the web from any of these market-makers but you can bid for one in a cyber auction held by Endowments Direct, which holds live auctions on-line every working day. You are required to register to enter the Endowments Direct website, although no charge is made for looking around.
If you sell your policy through Endowments Direct, there is a minimum commission payable of pounds 250. If you buy through the website, in addition to the bid price, you face legal fees of pounds 100 plus VAT. The service was set up by TEP broker IPTC and deals in second-hand with-profits life assurance policies underwritten by the top 50 UK assurers. The site includes a listing of these companies with links to their websites (if they have one).
Free policy valuation is offered for sellers. Purchasers may read an extremely complicated document on the site called "Computing the estimated price by iteration". This document is technical in nature and attempts to explain step-by-step how to compute a purchase price for a security, such as a traded endowment policy.
It would have been much more user-friendly if, instead of suggesting you grab a blank piece of paper, IPTC had mounted a value calculator along the lines of the calculators offered by many mortgage broker/lender websites.
Absolute Assigned Policies: