Should I sell my endowment?
I signed up for a 25-year endowment policy in 1989. I have never drawn on this for my mortgage and have instead kept it on as a savings policy.
Over the past couple of years, all I have read is doom and gloom about endowment policies. I am unsure whether to wait until the policy reaches maturity and hope that the tide turns in my favour, or cut and run.
Ask The Professionals: Mark Pearson, financial planning director at Oregon Financial Services, says:
Don’t surrender, cancel or stop paying premiums to any life assurance policy without first seeking independent advice. This is for a number of reasons but principally you don’t know when you are going to die (so the life assurance element is important) and because cancelling a policy before it matures often means that you will lose money.
The surrender value of with-profits endowment policies is usually less than the face value, due to a charge known as a market value adjustment, but the penalty generally reduces the closer you get to maturity. Depending upon the size of your premiums, you could continue with the policy for the full term, but redirecting that money into an investment that is more suited to your needs might be a better option.
One option is to ‘trade’ your endowment policy instead. This involves selling the policy (generally with no tax charge to you) to a company that specialises in buying this type of investment. The amount that they are prepared to pay is usually much higher than the surrender value, but will depend upon a number of factors, such as the company, the bonus history and the term to maturity.
When you trade a policy, it is not cancelled but the company becomes the new owner and the policy continues to maturity or pays out in the event of your death before that date. As legal owners, the company will get the policy proceeds but it will have to pay the premiums from the date it acquires the policy and your commitment to that policy will cease.
Companies that buy and sell endowment policies are regulated by the Financial Services Authority and you can get more information from the Association of Policy Market Makers.
You will need to compare the cost of maintaining the policy with the cash that you would receive for it and the benefit of making more tax-efficient use of the premiums that you save.
If you can get a good price for your policy, seek independent advice as to how best to reinvest the capital and start redirecting the saved premiums into a more suitable investment.
The amount of cash a policyholder receives from the life insurance company if they surrender (terminate) a life insurance policy before it becomes payable on death or maturity. Surrendering an investment-linked life assurance policy early is likely to be a poor deal as most policies load the majority of the policy’s fees and charges in the early years and so surrendering the policy back to the life company will result in a very low payout.
The Financial Services Authority is an independent non-governmental body, given a wide range of rule-making, investigatory and enforcement powers in order to meet its four statutory objectives: market confidence (maintaining confidence in the UK financial system), financial stability, consumer protection and the reduction of financial crime. The FSA receives no government funding and is funded entirely by the firms it regulates, but is accountable to the Treasury and, ultimately, parliament.
A contract written by a life assurance company to pay a fixed sum (“the basic sum assured”) to the assured person on a fixed date in the future or to their estate should the person die prematurely. The policies normally run for five, 10, 15, 20 and 25 years. Monthly premiums are calculated on the age of the life insured, the basic sum assured required at maturity and the length of the policy, so each policy is unique. The policies can be with-profits or unit-linked (see separate entries). A common investment product during the 1980s, endowment policies were sold alongside interest-only mortgages and designed to provide enough money to repay the capital borrowed at the end of the mortgage term. However, mis-selling scandals and poor investment performance discredited endowments as a mortgage repayment method.
Generally thought of as being interchangeable with insurance but isn’t. Assurance is cover for events that WILL happen but at an unspecified point in the future (such as retirement and death) and insurance covers events that MAY happen (such as fire, theft and accidents). Therefore you buy life assurance (you will die, but don’t know when) and car insurance (you may have an accident). Assurance policies are for a fixed term, with a fixed payout, and unlike life insurance have an investment aspect: as a life assurance policy increases in value, the bonuses attached to it build up. If you die during the fixed term, the policy pays out the sum assured. However, if you survive to the end of the policy, you then get the annual bonuses plus a terminal bonus.