What to do with an endowment policy you no longer want

What to do with an endowment policy you no longer want

The question of whether or not you should cash in an endowment policy depends very much on your individual circumstances: for example, whether you are confident that you can repay your mortgage by other means - perhaps by trading down your property. Or perhaps you feel the money could be put to better use - either in other forms of investments or simply to pay for a world cruise.

An important point to remember is that if you surrender the policy, you will lose the life insurance cover, which could be quite costly to replace as you get older or if you are ill.

If you do decide in favour of cashing in your policy, the first step is to ask the insurance company for a surrender value. As well as giving you this information, it is obliged to tell you that there is a second-hand market available on which you may be able to sell your policy.

Selling on your policy might provide you with a sizeable premium above the surrender value, which is normally set at a low level because the insurance company is anxious to retain your money.

Once you have obtained the surrender value, the next step is to contact one - or several - of the companies dealing in second-hand policies. The Tep market has grown enormously in the past 20 years or so. Originally there was only one company that auctioned life policies, but during the 1980s a large number of private market makers were formed to buy and sell endowment policies directly, without going through the auction system.

During the stock market depression, demand for second-hand policies - as for most other investments - dropped to a low level, and the prices offered were often not much above - or even below - the surrender values.

In recent years, though, the Tep market has been transformed by a surge in demand, mainly from institutional investors and especially in Europe, where with-profit funds are not generally available. It is estimated that the market has a current annual turnover of £500m a year.

Institutions are attracted by having a "safe" core investment for their funds, with the prospect of a steady return, while private investors are drawn by the prospect of acquiring a ready-made investment with the bulk of the charges having already been paid in the early years. A Tep is a savings plan with a "lock in" value made up of the sum assured plus the accrued annual reversionary bonuses, which cannot be taken away. So there is little or no risk of losing money.

If you are lucky enough to pay less than the "lock in" value then you are guaranteed a profit. In most cases, investors are likely to pay a premium to the "lock in" value in the hope that over the years there will be sustained return over and above the premiums which are paid by the new owner of the policy.

Private investors can cover school and university fees - or provide additional retirement income - by buying several Teps maturing over a period of years. These can be cashed in using the investor's annual capital gains allowance, allowing the proceeds to be received tax-free.

One problem in terms of long-term planning is that if the original policyholder dies, the policy matures immediately. However, in most cases, the policy simply runs to maturity at a known date.

There are six main companies who are members of the Association of Policy Market Makers, which is regulated by the Financial Services Authority (FSA) and has code of conduct. They account for something like 95% of the total Tep market. There are also some smaller market makers not regulated by the FSA, who trade through independent financial advisers for compliance purposes.

Market makers claim that current demand for Teps considerably exceeds supply. They are confident that the expected huge flow of Standard Life policies can easily be absorbed, although a really large volume of extra sellers might result in a drop in the premium paid above the surrender value.

Currently, the average premium paid is between 5% and 15% above the surrender value, although it could be a lot higher for the "right" kind of policies: namely, those which are in most demand. Don't be fooled by any of the extravagant claims of premiums over 30%: that is most unusual.

The ratio of premium to surrender value varies considerably according to the size of the accumulated "lock in" value, the length of the policy until maturity, and the status of the insurance company. Normally, market makers insist that the policy has a surrender value of at least £3,000 and has been running for a period of five years. The highest premiums are paid for policies with 10 to 15 years to run before maturity.

Some market makers will only buy policies if they have a matching buyer. Others like to build up large portfolios of policies, providing a choice for potential buyers. All of them may turn their noses up at policies from insurance companies who are financially weak and may fail to provide a decent return. However, that is not the case with Standard Life, whose policies in the past have often earned an extra premium on the secondhand market.

It is definitely worth looking around for competitive offers because some market makers may have lots of potential buyers prepared to pay higher prices. Names of the different market makers can be easily obtained via the internet. You can obtain competitive price offers to get an idea of how much your policy is worth compared with the benchmark surrender value, and you do not have to commit yourself to sell.