Surrender or sell? Explaining endowment options
During the eighties and nineties, taking out endowment policies was a popular form of investment. Since then, disappointing returns from insurance funds coupled with lifestyle changes (redundancy, divorce, mortgage changes, etc.) have led many people to consider whether to surrender (cash in) their endowment policies back to their insurance company. The option of selling endowment policies has also caused many worried policy holders to prick up their ears and consider their options.
The problem with endowments
If you are an existing endowment policy holder who took their policy out in the nineties, you may remember the projections of 7.5 % mid-range growth over the term of the endowment (more in the eighties). If, like many others, you took out your endowment chiefly to pay off the sum remaining on an interest-only mortgage, the future looked rosy.
Unfortunately, the stock market has not behaved as projected, and endowment holders have had to endure year upon year of reduced bonuses, becoming anxious that they will experience a shortfall. Some policy holders, especially those who have experienced redundancy or other changes in circumstances, have considered surrendering or selling endowment policies.
Who would buy an endowment policy?
The reason selling endowment policies has become so lucrative is largely due to foreign countries, particularly Germany, who tend to invest heavily in insurance funds, seeing them as low-risk, long-term investments. Market makers have obliged by sourcing policies from an ever-increasing range of life offices and the demand has pushed prices up.
Surrender or sell?
People’s circumstances vary and ultimately independent financial advice is needed to determine whether someone should sell their endowment policy. There are other options: policy holders can choose to borrow against their investment, auction their policy or make it ‘paid up’, whereby they stop contributing in return for a lower payout at maturity; penalties may apply if they take this option. However, selling endowment policies is usually preferable to surrendering it to the original insurance company, simply because the amount received can be substantially higher than the surrender value.
How do people go about selling endowment policies?
To start with, to qualify for the endowments market, your policy must be of the ‘with-profits’ type. If you are unsure what type of endowment you have, check your statement; if you receive bonuses in sterling and there is no mention of units you have a ‘with-profits’ policy. Eligible policies generally need to meet minimum running time and/or surrender value (typically £1,500) to be of value.
Endowment policies are sold on the TEP (or SHEP) markets (the traded or second-hand endowment policy markets). If you are thinking about selling, you should ensure the TEP market makers you choose are APMM members, since this guarantees they are FSA regulated (APMM have a helpline for queries about this). Alternatively, there are endowment market brokers who can look for the best deals on your behalf.
An important consideration to make before selling
Of course, as well as an investment, you must remember that an endowment policy is ultimately a life assurance product. Therefore, bear in mind that selling endowment policies also results in losing out on a lump sum in the event of your death.
To sum up, endowment policies are a valuable insurance product, generally providing low-risk, long-term investment. However, underperforming stock markets and low inflation rates, often combined with changed family circumstances, are tempting many policy holders to consider surrendering their endowment. Selling endowment policies is another option for those who want to get a better price for their policy.