Money Guide

Selling Endowments

Written by

Hazel Cottrell
hazel.cottrell@consumerchoices.co.uk

In this guide we will look at the advantages of keeping and of selling your endowments and explore the ways to do each well.

Endowments have been a massive disappointment for millions of consumers, under-performing and leaving them with great shortfalls. While many have been able to claim compensation due to the miss-selling of endowment policies, they are still stuck with the policy itself.

In this guide we will take a close look at endowments and the different options that endowment policy holders have.

• What is an endowment?
• What's happened to endowments?
• What can I do with my endowment?
• Estimating endowment value
• Keeping an endowment
• Surrendering an endowment
• Selling an endowment
• How do I sell an endowment?
• Points to remember

Back to the top

What is an endowment?

An endowment is a form of life insurance, with a savings and investment policy. Endowments were massively popular in the 1980s and 1990s, classically being sold in combination with interest-only mortgages.

With an endowment mortgage, you would not repay any of the capital you borrow during the term of the loan. Instead, the endowment policy should grow to produce a lump sum large enough to repay the loan in full at the end of the pre-agreed period. Your monthly payments would be made up of interest on your mortgage loan, the premium for the endowment and life insurance which would ensure the loan was repaid if you died.

Back to the top

What's happened to endowments?

When they first became popular, inflation and interest rates were high and you could get tax relief on endowment premiums. Endowment mortgages looked like great ways to repay home loans, benefit from life insurance and receive cash sum payouts at the end of the term. At their peak, endowments were bought alongside 83% of mortgages, being heavily pushed by brokers.

However, tax relief on premiums paid to endowments was cut years ago, inflation and interest rates fell, and the majority of endowment policies have not performed well, leaving millions of endowment policy holders with a shortfall. According to the Fair Investment Company (www.fairinvestment.co.uk), 86% of endowment holders are expecting a shortfall which not only means that they will receive no lump sum, but that they will have to stump up extra cash just to cover the cost of their mortgage.

According to the Fair Investment Company, 87% of Brits who have an endowment policy believe that they were sold it under false pretences and a massive 49% of respondents said that they had been given a guarantee that their policy would cover the mortgage.

If you believe you were miss-sold an endowment policy (i.e. the risks involved were not explained to you at the time the policy was taken out) you can complain and may be awarded compensation.

Back to the top

What can I do with my endowment?

If you have an endowment, you basically have four options:

• Keep your endowment and continue paying the premiums
• Keep your endowment and stop paying the premiums
• Surrender your endowment
• Sell your endowment

The advantages and disadvantages of these are discussed in the sections below, but it’s vitally important that you do not act rashly. Cancelling or cashing in your policy early or stopping paying premiums could leave you out of pocket so it’s important that you work out the sums very carefully and consult an independent financial advisor if in doubt.

Whatever you do, do not increase your endowment premiums or take out a further policy to makeup the shortfall – this would be simply throwing good money after bad.

If you are expecting a shortfall then you should think about making overpayments on your mortgage if at all possible. If you have a mortgage of £100,000 at 6.5% with 10 years left then making overpayments of £50 a month for the remaining term would knock £6,000 off your capital debt and save you £2,073 in interest.

Another option is to start saving elsewhere to make up the shortfall. The most effective way to do this will usually be by using a Cash ISA or Shares ISA or a high interest savings account. Saving £50 a month for ten years in a cash ISA paying 5% tax-free interest would produce a savings pot of £7,750.

Back to the top

Estimating endowment value

Deciding whether or not to ditch your endowment can require some complicated calculations.

Basically, your decision will depend on how you predict your policy will perform in the future. Returns will come in the form of annual bonuses and potentially a terminal bonus. Bonus rates are controlled by the provider at their discretion, which makes future growth very difficult to predict. Some of the worst performing endowments are currently paying bonus rates of 0%.

What you need to estimate is the potential value of your policy at maturity, if you were to continue paying your premiums. Asking your provider for the last three years’ annual bonus rates and the current maturity values and terminal bonuses of policies which ran for the same term as yours but which are maturing now can help you get a rough idea of your own maturity value, but remember that past performance isn’t always a direct reflection of the future.

If the last three years bonuses have been negligible and maturity values including terminal bonuses are very low then this is likely an indication that your endowment will not fare well either.

Once you have estimated the value of your endowment at maturity, compare this value with the amount that would be gained if you surrender or sell your endowment now and placed the resulting cash in a high interest savings account or ISA for the remainder of the policy term. This should give you a good idea whether cashing in the policy now is a more profitable move to make.

These calculations can be very complicated and if you have any doubts about your own calculations it’s best to consult an independent financial advisor who can do all the hard work for you, estimating how your endowment might grow to maturity based on a range of assumed growth rates.

Back to the top

Keeping an endowment

Endowments which are continued through to maturity will usually provide the best returns. This is because of the terminal bonus, a large sum paid out at the end of the policy term which can be up to 60% of the total payout on an endowment policy.

Many people choose to keep paying their premiums in order to receive this bonus, however the amount you will receive is not guaranteed, so keeping your endowment still poses a risk.

However, you may also be able to make your endowment “paid-up” which means you will stop paying the premiums but will still benefit from the life insurance element. If you do stop paying your premiums then you are likely to lose the terminal bonus, instead receiving only the annual bonuses which are much smaller.

The decision on whether to stop paying depends on the type of policy you have, the age of the policy and the potential penalties of cancellation.

If you are in the early years of your policy, then it may make sense to keep it because if you surrender it you’re unlikely to get back as much as you have put in. It can take as long as seven years just to break even so as a general rule you shouldn’t surrender or sell unless the policy is at least ten years old.

It’s important to remember that an endowment policy also includes life insurance element, which will pay off your mortgage if you die. If you were to surrender or sell your policy, you may need to arrange life insurance elsewhere. Getting cover can be expensive if you're older or you have health problems, so it’s important to take these costs into account.

Back to the top

Surrendering an endowment

Surrendering your policy in the early years will result is very poor returns indeed, if any at all. The reason for this is that the charges on endowments are “front-loaded” which means that the bulk of the costs are taken by the salesman and insurance company up front. As a result it may take years of paying premiums to get a return on your investment and if you cash it in early you may get less back than you paid in.

However, if your endowment is likely to fall short of its target, it may make financial sense to switch over to a repayment mortgage instead. In that case, you wouldn’t need the endowment policy and if you surrendered or sold it you could use the proceeds to pay off some of your mortgage early.

Many people are eager to rid themselves of the burden of endowments, but in most cases, surrendering your policy is not the best way to ditch your endowment as your insurer will generally offer you a very poor surrender value, even if it’s close to maturity.

If you are looking to ditch your policy, it can be much more profitable to sell your endowment to a third party rather than cash in your policy back to the insurance company. It is definitely worth getting a quote from an endowment broker who may be able to offer you more (see below).

The only exceptions are unit-linked endowments. There is no market for selling second hand unit-linked endowments as the unit value is set so there is no uncertainty about what the policy is worth. You wouldn’t sell your units for less than they are worth and if a buyer wanted to invest in specific units they could do it directly, without an endowment policy. If you want to get rid of a unit-linked endowment your only option is to surrender it.

Back to the top

Selling an endowment

If you do want to dispose of your endowment then in almost all cases selling your endowment will be much more profitable than surrendering it.

The difference can be up to 35% more, but the amount that third party buyers will offer you will depend on a variety of factors, including the age of the policy and the company that issued it.

If you sell your endowment policy on to an investor, it is known as a Traded Endowment Policy (TEP). The new investor will take on responsibility for paying the remaining premiums (if applicable) and will be entitled to all future benefits of the policy including the annual and terminal bonuses.

The price that you could sell your policy on for could be dramatically higher than the surrender value offered by your insurer. This is because the value of an endowment held to maturity could be worth a lot more than its current surrender value. Investors will buy your unwanted policy at a higher price than the insurance company because the policy will increase in value by the end of its term.

Furthermore, the life insurance element of the policy will continue to cover the life of the original policy holder – if you die before the policy’s maturity date then it is the investor who will receive the lump sum insured.

Back to the top

How do I sell my endowment?

There are special policy auctions as well as specialist dealers to whom you can sell your policy.

Generally, to be suitable for sale your policy must:

• Be a “with-profit” endowment (not a unit-linked or pension policy)
• Have been running for at least five years or one third of its term, whichever is greater
• Have an up-to-date surrender quotation from your Life Office (generally a minimum surrender value of £1,000 is required)
• Have the latest bonus information available (you should contact your Life Office if you do not have an up-to-date statement)

It’s a good idea to shop around and get quotes from all the TEP traders you can. Quotes can vary so don’t go for the first offer - wait until you know which is the best deal.

You can try auctioning your policy, for example with H E Foster & Cranfield (www.foster-and-cranfield.co.uk) but ensure that your reserve price is equal to the highest price that you received from the TEP traders. It’s important to take into account the auctioneer’s charges, however they may be flexible and you may be able to negotiate them down to a lower fee.

Back to the top

Points to remember

• Deciding whether to keep, surrender or sell your endowment policy is a big decision so ensure you have weighed up the potential gains and losses from each option, as well as getting independent financial advice if necessary, before you act.
• If you do give up your endowment policy, remember that you will no longer benefit from the life insurance element of the policy. You should definitely assess whether you need to buy a separate life insurance policy.
• If you decide to surrender or sell your endowment, ensure that you switch to a repayment mortgage or set up an alternative vehicle to pay of your mortgage, such as an ISA.
• If you can make overpayments on your mortgage then do, but check for penalties and make sure your lender will credit the overpayments straight away – some will only knock them off your debt at the end of the year.