If you no longer need your endowment, either because you have changed your mortgage to a capital and interest mortgage or have been lucky enough to pay off your mortgage using other means, perhaps through an inheritance, you will probably be thinking what is the best thing to do. You may feel there is little point in paying regular premiums for an investment that you do not need, especially if you have been disappointed with the investment performance.
Most people automatically surrender their policy back to the insurance company, which although being quick and simple, is not necessarily the best thing to do.
One option is to sell your endowment on the second hand market. By doing this you could increase the amount you get by up to 45 per cent. If you have a unit linked endowment plan, then it won’t be possible to sell your endowment, but if you have a traditional with profits endowment, this option remains open to you.
During times of adverse investment conditions the surrender values offered by companies can be particularly disappointing for investors. Surrender values for unit linked policies are merely a reflection of the value of the underlying assets and so will fall and rise on a daily basis in any event. The calculation of the surrender value for a traditional with profits endowment policy, however, is far more complicated.
In simple terms, the insurance company will look at the value of the assets held within the fund; ie, shares, commercial property, fixed interest securities, cash, etc, and compare this to the value of everyone’s with profits policies, including bonuses. If investment values are low, the value of the underlying assets is likely to be less than the value of policies and annual bonuses. In this case, the surrender value will be based on the proportionate entitlement to the fund. After all, if everyone surrendered their with profits plan on the same day, there would be insufficient value within the total fund to pay the full value of everyone’s policy including bonuses. Scaling back surrender values in this way is known as applying a “market value reduction” or “MVR”.
As a point of interest, annual bonuses are only guaranteed to be paid if the policy is held to maturity. By selling endowments rather than surrendering, no MVR is incurred as the policies remain in force and this is one of the reasons why it is possible to secure a much better return.
If you have a traditional with profits endowment, you may be able to sell it on the second hand market; but remember of course, by selling your endowment you will lose the valuable life cover that comes with it so it may be necessary for you to make alternative arrangements.
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.
