FOOL'S EYE VIEW
Selling Your Endowment

By Jane Mack (TMFJane)
August 9, 2002

Some friends of mine have recently been thinking about cashing in their endowment policy. They took it out more than a decade ago to cover the mortgage but have now decided to get shot of it to reduce their outgoings so the wife can spend longer at home with the baby they're expecting early next year.

The plan of action is to use some of the money to clear all their debts and to use the rest to reduce their mortgage a little. The idea is to switch to a simple repayment mortgage, borrow less and increase the term. With no credit card debts to pay, their total outgoings should be a fair bit lower than they are now and as they're comparatively young, they're not fussed about extending the term of the mortgage.

It's fair to say that they're rather disillusioned with the endowment mortgage market anyway. So far, around 1.25 million people in the country have received a letter telling them whether their endowment policy is expected to provide enough to pay off their mortgage. Around 60% of those letters say it's unlikely. To date, my friends haven't received a letter but there are currently 10.2 million policies in existence and the remaining 8.95 million policy holders haven't had a letter yet!

At any rate, disregarding the merits of their plan, which may or may not be the best thing to do in their particular circumstances, how do they get the best price for their policy?

Well, the first rule about getting rid of an endowment policy is never to surrender without considering the alternative courses of action. Apart from anything else, if you do this in the early years of the policy, you're unlikely to get back as much as you've paid in – it can take as much as seven years to break even. Additionally, at the moment many companies are imposing extra penalties if you surrender, due to the recent falls in the stock market.

About 1,000 people a week lose out by an average of £1,000 to £1,500 by surrendering policies to the insurer they took it out with. You can usually get far more if you sell it on the open market to a company that trades in 'second-hand' endowments – they're known as TEPs (Traded Endowment Policies) – and on average sellers get about 10-15% more than if they surrender so it's well worth shopping around!

(In fact, you might enjoy this rather beautifully written tale from a Fool which tells you exactly how to do it. It was written aeons ago but I still like to re-read it occasionally to remind myself of how well our Fool played the game).

Some TEPs companies are members of the Association of Policy Market Makers which operates a code of practice and they're a good starting point if you want to make a few preliminary enquiries. For example, if you supply them with the required information they'll obtain three quotes for you so you've got a rough idea of what you might get.

If you've been thinking about selling an endowment then you need make sure that your policy qualifies. For a start it needs to be a 'with-profits' or 'whole of life' version. It also needs to have been running for at least a third of its full term or five years, whichever is the greater. You also need to contact your insurer to get hold of the latest surrender value – which must be at least £1,000 - and also find out the latest bonus information.

According to the APMM, only one third of all policies taken out reach maturity with the original policyholder. About 30% are cancelled in the first few years and 40% are surrendered or sold mid-term. But, it's as well to know that if you need to raise some money then you can also borrow against the policy. Alternatively, making it paid up will mean that you can free up your monthly payments which can be used for other things.

Whatever you decide to do, you really should think hard before selling. After all, there wouldn't be a market for TEPs if buyers didn't think they were worth investing in.

More: Homeowning Centre | Endowments and Life Assurance Discussion Board