Cashing in: surrendering your endowment
It is a well-known fact that the reputation of endowment policies, seen as potential money-spinners in the eighties or nineties, has plummeted over the last two decades. Changing family circumstances, for example divorce or redundancy, has led many endowment policy holders to look at releasing their capital by surrendering their policy back to their insurance company. But is surrendering endowment policies necessarily a wise move? Are there other options?
Where it all went wrong
When the financial markets were looking quite healthy, back in the eighties and nineties, endowments seemed to make sense. Not only could you get guaranteed life assurance to protect your loved ones, the annual reversional bonuses would keep mounting up until the policy matured, whereupon you would get the lump sum, the accrued reversionary bonuses and, possibly even a terminal bonus. Even the most conservative projections seemed healthy enough to persuade low-risk investors to take out an endowment, often to pay off their interest-only overdraft at the end of its term. The need for surrendering endowment policies early seemed unlikely
Unfortunately, following the downturn in the economy this century, life house investment funds have underperformed drastically and by 2001, the FSA began to report that less than a third of endowment policies were reaching maturity as disgruntled investors started surrendering endowment policies. This withdrawal of capital from the life offices exacerbated the problem further.
Releasing capital through surrendering endowment policies
The poor performance of endowments, together with the associated negative press has understandably got many endowment policy holders nervous. As their annual reports consistently show poor bonuses and the looming prospect of mortgage shortfall creeps ever nearer, policy holders understandably start to consider surrendering endowment policies and re-investing the capital
The attraction of surrendering endowment policies increases when a policy holder suffers redundancy, divorce or some other financially demanding life event
The problem with surrendering endowment policies
As with many financial products, there are penalties to pay when you fail to allow an endowment policy to mature. Life houses apply Market Value Reductions to compensate the remaining trust investors and any life benefits are lost. In short, surrendering endowment policies early will always provide less cash than that accrued to date.
Other options available
Endowment policy holders may feel stuck in a no-win situation: they can surrender early and lose their life assurance benefits plus miss out on any future recovery in the stock market, or they can hold on tight to their policy and risk being unable to pay off their mortgage.
Fortunately, there are other options available. For investors with a traditional ‘with-profits’ endowment policy, there is the potential to receive a higher price than the surrender value by selling on the traded endowment policy (TEP) market. Despite current economic conditions, some fund managers still buy endowment policies to balance their portfolios, particularly if they have European clients who tend to value their strength as a low-risk asset. It is important to sell to a member of the APMM as they will be FSA-regulated.
Another alternative to surrendering or selling an endowment policy is to negotiate with your mortgage lender to either convert the loan (or just the shortfall amount) into a repayment mortgage. An endowment policy can even be extended providing your mortgage lender and the life house agrees to this.