Should You Sell Your Endowment Policy?
You may be keen to cash in your endowment if returns are low, but here's why selling the policy on could be a better option for you.
Last week I talked about the pros and cons of cashing in your endowment early in Should You Ditch Your Endowment? But getting rid of the policy isn't your only option. Did you know you could get a better price by selling it through what's known as the traded endowment policy market?
What Is A Traded Endowment Policy?
A traded endowment policy (TEP) is an endowment that the original policyholder has sold on to an investor. The new investor is then entitled to all future benefits that the policy provides, as they have effectively bought it second-hand. They will also take on responsibility for paying the remaining premiums (if applicable).
But why would you want to sell your endowment rather than cash it in? The answer to this question is simple. The price that you could sell your policy for can often be significantly higher than your surrender value - that's the value of your policy if you cash it in early.
And why would anyone want to buy your unwanted policy? Well, the value of an endowment held to maturity could be worth a good deal more than its current surrender value. Plus, the new investor will benefit from any ongoing annual bonuses and terminal (final) bonus.
On top of that, the life insurance element of the policy will continue to cover the life of the original policyholder. If the original policyholder dies before the policy's maturity date, the new policyholder will receive the insured sum.
So, in other words, if you die after selling your endowment policy, the new owner of the policy will receive a lump sum!
How To Trade A Policy
Here's how to trade your policy.
The TEP market brings together buyers and sellers of endowment policies. There are several companies who can do this for you. You could try The Association of Policy Market Makers or The TEP Exchange.
Alternatively, you can also sell your policy by auction. Auctioneers can often sell policies that are not suitable for market making. If you have no luck with the market makers, selling by auction may be your next best bet.
Before you can sell, you'll need to provide buyers with certain information about your policy such as:
The name of your endowment provider and your policy number
The date your policy started and its maturity date
The gross premiums payable under the policy
The basic `sum assured' - this is the amount of life insurance included in the plan
The most recent surrender value (cash in value) you have been quoted by your provider
The total annual bonuses attached to the policy to date
Once you have done this, your details will be circulated to potential investors who will decide if they are interested in taking on your policy and at what price. This could take several days but offers will be made quickly on attractive policies. You can then accept the best price for your policy if you're happy with it.
Not surprisingly, would-be investors are a little picky about the type of policy they want to buy. First of all, your endowment must be a traditional with-profits policy (a with-profits policy is one where returns are smoothed and paid out in the form of bonuses).
There is no market for trading second-hand unit-linked endowments (a unit-linked policy is one where returns reflect the performance of the underlying fund). This is because the margin between the surrender value and the long term maturity value is small, so they aren't generally a good prospect for selling on.
For a policy to be saleable, it will usually need to include the following features:
As mentioned above, your endowment will need to be a traditional with-profits policy
Your policy will need to be reasonably close to its maturity date. Some market makers specify the policy must have run for at least five years. That said if there are say, ten years left until maturity, your policy will be unattractive to investors because there is too much investment uncertainty over this relatively long period. It's unlikely a policy with this amount of time left to run will receive any offers from potential buyers.
The policy must have a minimum surrender value of at least £1,000. Some market makers may require more.
Buyers are most interested in endowments run by financially strong providers. That means policies managed by companies such as Prudential, Norwich Union, Scottish Widows and Standard Life will appeal to investors more.
What are the drawbacks?
Firstly, there are no guarantees that anyone will want to buy your policy or that they will be willing to pay a price above your surrender value. If your endowment doesn't meet all the criteria set out above you may not receive any offers. If that happens, you'll need to consider whether it's worth cashing in the policy or holding it until maturity.
Secondly, although the TEP process sounds quite straightforward it can be time-consuming. The buyer will want to check your policy has not been assigned. In other words, if an endowment has been assigned to a mortgage lender, for example, that particular lender is entitled to the proceeds and therefore it can't be sold on. All this takes time. In some cases it can take several months to complete the sale.
For the hassle involved in the selling process, if the offer you have received for your endowment is only slightly higher than the surrender value, it may not be worth the effort.
That said if you have been offered a generous price and you no longer want or need your endowment, I would say selling up is definitely worth considering as an alternative to cashing it in.
More: Is Your Endowment A Letdown?