The Sunday Times – 4 March 2001
Don’t cash in your endowment, sell it
Edition 1GP SUN 04 MAR 2001, Page Money 16
Thousands of investors who surrender policies early are losing money. Liz Phillips explains the options.
INSURERS could soon be forced to tell customers who want to surrender their endowment policies early that they could make more money by selling them. Most people simply cash in endowments which have not run the full term with their insurance company, but a healthy secondhand market in the schemes exists. Policyholders can typically get 30% more for a policy by selling it rather than cashing it in with the insurance company. The policy is then transferred into another person’s name who continues to make monthly contributions. Investors are losing about Pounds 1billion by year by not selling their policies, according to Tim Villiers of the Association of Policy Market Makers (APMM).
Industry experts estimate that only one in three suitable policies is sold on the open market.
The difference between the surrender value offered by the life company which sold the policy and the price you can get is substantial.
When panic set in last year because of the threat of shortfalls to endowment mortgages, thousands of homebuyers surrendered their policies, not knowing that they had the option of selling them. Pressure is mounting on the industry to tell people about the options available.
The Personal Investment Authority, the industry regulator, will discuss urging life companies to issue clear guidelines at this month’s board meeting.
Although the value of traded endowment policies has risen from Pounds 5m to Pounds 500m in 10 years, the market could treble if more people knew that they could sell their policies.
Some members of the Association of British Insurers (ABI) already point out the alternatives and there is information on trading endowment policies on the ABI’s website.
About 30% of policyholders cash in their schemes within the first three years, even though this is the worst possible thing they can do.
The life insurers’ charges are all loaded on to the early years of the policy, so people cashing in a five-year old endowment will probably get back less than they have paid in.
Not all policies will be suitable to sell, however. Unit-linked policies are generally difficult to trade.
There are three main ways of selling a policy.
Market makers These are companies which buy your policy and then sell it on to an interested investor.
Most belong to APMM, which will provide a list of its members and offers an advice service. Many, such as Beale Dobie and Policy Portfolio, have websites offering guidance and the opportunity to register for a free quote. It is important to shop around as quotes can vary widely.
These represent a kind of middleman service, shopping around on your behalf to find the best quote and negotiating with market makers to get a better price. Commission of up to 3% is usually charged to the buyer. Operators include Endowment Surrender Plus.
Mark Wayman of Endowment Surrender Plus says companies like his can negotiate higher cash offers from market makers than an individual going alone.
“They know they’re in competition with each other when I call,” he says. “The average policy we deal with is about Pounds 10,000 to Pounds 15,000. We don’t offer advice on whether to sell -most clients have already made their minds up when they contact me -but I will point out that life cover may need to be taken out elsewhere.” Wayman says the market has increased enormously over the last few months because of letters from insurance companies, indicating that they are heading for a shortfall on their mortgage. But there are still a lot of people out there unaware that they could be selling rather than surrendering.
Auctioneers Auctioneers are frequently less fussy about the kind of policies they will sell. They typically take a third of the difference between the surrender value and the price achieved.
Foster & Cranfield has been auctioning policies for many years. The company will sell policies only a quarter of the way through their life with a minimum of 2A years gone and with a minimum surrender value of Pounds 750.
If you do decide to sell your policy you must make sure you have an alternative method of repaying your mortgage and make other arrangements for life insurance.
READING the financial pages helped Leicester couple David and Mary Allen make an extra Pounds 2,080 on their endowment policy with Clerical Medical.
They had read that there was an alternative to surrendering their policy, so Mary, 49, shopped around to find out how much it was worth after being quoted a surrender value of Pounds 8,145. The highest offer of Pounds 10,225 came from Baronworth Investment Services.
Mary, who works part-time at a local supermarket, said: ‘We didn’t need this policy for our mortgage, so we decided to sell it to pay off a loan and to replace our old car.
‘I asked the people at Clerical Medical if they had any objections and they were in favour of it as it means the policy will continue. Now our finances are straight and we have a lovely car.’
ALTERNATIVES TO SELLING YOUR POLICY
You can make the policy ‘paid up’, which means you agree with your provider to pay no further premiums. Your policy will still mature at its set date, but the sum insured will be down-graded to when you stopped paying in, which will dramatically affect its maturity value. Although you will still continue to get bonuses on your existing fund, if you’ve only paid in a small amount, charges could eat up most of the gains.
A short term option is to take a premium holiday. The maximum period is usually 12 months, but it may give enough ‘breathing space’ to tide you through a difficult patch.
Remember, however, that selling your policy means that you will no longer be entitled to a windfall if your insurer demutualises in future.