Endowment shortfall? Selling could be the best option

If you’ve recently received your endowment plan annual statement you may have been left feeling disappointed and thinking “Why did I bother?”, especially when the value of the plan is not much higher than the annual statement last year. Unbelievably, however, in some cases, the plan may not have increased in value at all.

So, the question is, what do you do? There are various choices for those with endowment policies that continue to disappoint.

Firstly, look at the bigger picture. It is important that you assess the continued suitability of your endowment in the light of its total performance over the term of the plan and not just for the previous few years. If the endowment is more or less on target to pay off your mortgage at maturity and it’s only in recent years that performance has been particularly poor, then waiting out what is hopefully a short-term, dip in performance may well be the best thing.

Alternatively, investigate other investment funds within the range offered by your insurance company. If your insurance company offers a wide range of investment funds you may wish to look at other funds offering greater prospects for investment growth. You will, however, have to balance risk with reward; afterall, it’s no good investing in a fund you are uncomfortable with, and is very volatile just because it has had good performance. You have to match the level of risk that you are willing to take with the level of returns that you require. If the level of risk required is above that with which you are comfortable, this option probably isn’t for you.

Another option would be to increase your contributions or set up a separate additional investment, such as an ISA or unit trust.

You could also look at the other options available to you with regard to your mortgage. If your plan has no chance of being able to pay off your mortgage, look at the option of switching part or all of your mortgage to repayment. This may cost you more initially but will guarantee that part of your mortgage is paid off.

If you do change your mortgage to repayment, then you can either surrender your endowment policy back to the insurance company or you may be able to sell it on the second hand market.

If you have a unit linked endowment, your only option will be to surrender it to your insurance company and the value that you get will be the value of the units you have accumulated on the day you surrender your plan.

If you have a traditional with profits policy, your options extend to selling it on the second hand market. Surrendering it back to your insurance company could well mean that not only do you benefit from any terminal bonus but the insurance company apply what is known as a “market value reduction” and this is particularly the case in times of poor investment returns. A market value reduction will reduce your surrender value to more accurately reflect the value of the underlying assets. What this means in practice is that you may not get all the bonuses that have been added in the past.

There is vibrant market in second hand endowment policies which can be bought by private and institutional investors alike. The amount received by selling your with profits endowment can be as much as 45% higher than the surrender value. However, not all policies are saleable and the amount that you receive for your endowment will be dependent upon factors such as which insurance company the plan is with, monthly premiums, bonuses to date and length of term left to run.

Daniel Collins writes on a number of topics on behalf of a digital marketing agency and a variety of clients. As such, this article is to be considered a professional piece with business interests in mind.