Trading In Endowments Can Boost CashBy Colin Jackson
Endowments have become the pariah of the financial world, as the presumed promise to meet the final cost of mortgages has, in many cases, fallen short.
Endowments are investment plans which were usually sold alongside mortgages in the 1980s and early 1990s so that those who wanted an interest-only mortgage on their property – where they are not repaying the capital amount borrowed on a monthly basis – could put away a smaller amount each month to grow to meet the final cost of the initial loan taken to buy the house.
Endowments had many advantages, not least that there was an element of life insurance within the policy, and that many people who would not have been able to afford the house of their dreams on a repayment loan had the opportunity of buying a better property.
But falling markets and overpayment of bonuses within these policies in good years, which left nothing in the pot for bad years, have turned endowments for many from a dream product into a nightmare, and hundreds of thousands of homeowners who would have been relying on their endowment to pay their mortgage now have to find another way of funding the final payment before they own their home.
For these reasons, the endowment has fallen far out of favour, and they are now only sold by a few insurance companies directly. But they are finding something of a resurgence in a different type of market – the traded endowment policy (Tep).
Teps are “second-hand” with profits endowment policies that are sold on to individuals, companies, pensions, specialised funds and the like. The purchaser pays the purchase price and is then responsible for payment of future premiums. The life assurance cover remains on the life or lives of the individuals who initially took out the policy, but all policy benefits on maturity or on the death of the original policyholder become the property of the new owner. It is a slightly odd situation, that you could be benefiting from the death of another person through an investment product, but that is how the rules work.
If you no longer want your with profits endowment policy, then there are a number of options available to you:
- Surrendering the policy back to the life company.
- Borrowing against the policy, either from the life office or from a bank who might wish to hold the policy as security.
- Making the endowment policy “paid up”. This means that you will not pay any further premiums but the value of the policy will be reduced on maturity or death.
- Auctioning the policy.
- Selling the policy on the second-hand Teps market.
Selling Your Endowment
If you decide to sell you endowment, then you will want to be sure you will get the best price. You could approach a number of Market Makers - the companies that buy the policies - off your own back but this can make it time consuming to cover the whole market.
Another alternative is to instruct a trawling company who approach the vast majority of the Market Makers on your behalf. This maximises the change of you getting the best price.
The procedure is quite straightforward. Depending on the company you are dealing with, you can often complete a form on line and submit it. The ‘trawler’ will then approach a panel of Market Makers to get the best price for your policy. This takes approximately 10 working days.
You will then be informed of the best price available, and then you have to decide whether you want to go ahead with the sale of your endowment or not. If you do not go ahead then there is no need to contact the company you are dealing with, although you may feel that the process is more complete if you do. But if you want to go ahead, then you will need to complete the paperwork and send the endowment policy on.
As a rough guide, it takes four to six weeks for the sale to be completed. On completion you will receive a cheque for the full amount of the sale price without any deductions. The purchaser pays the ‘trawler’ separately for the transaction, so there is no cost to you.
Of course, there are some reasons why you would be better to hold onto your endowment policy, especially if there is only a short time to run on its term, but if you are unsure what the best course of action is, then take advice from an independent financial adviser (IFA) before making any decisions you might regret.
Colin Jackson is a director of The Traded Endowment Trawling Service Ltd and Baronworth (Investment Services) Ltd.