How to get more for your endowment
Originally published in This is Money, 6 May 2008
With higher bills biting and endowments still failing to deliver many homeowners who have switched to repayment mortgages may be considering cashing their policies in.
But policyholders are often surprised to discover that the endowment that has not come up to scratch against their mortgage may be in demand elsewhere.
Selling a policy can deliver a much better result that surrendering it, with Market Makers acting between policyholders and institutional investors interested in buying.
In the first part of This is Money's two part look at endowments, Paul Harrison of Market Maker 1stPolicy, looks at the market for second hand endowments.
Such is the nature of the 'with profits' endowment policy, that it can be a bit like waiting for the fifth card in a game of poker i.e. you're never actually sure if you've got good hand until the final card is dealt.
The maturity value of our old friend the 'with profits' endowment is largely dependent upon the level of final bonus which is applied.
Unfortunately this bonus is completely at the discretion of the life office and remains variable right up until the day of maturity, leaving many policy holders feeling like they are playing a blind hand.
It is for these reasons that more and more policy holders are turning to the open market as an exercise in damage limitation.
The open market option has been around for many years but it has been made more accessible of late.
Even life offices are now obliged to inform policy holders that their policy could fetch more money should they choose to sell it on the open market rather than surrender it directly.
The good news is that policy traders seem to have developed a renewed appetite for endowments and are offering on a wide range of policies, many of which were previously un-tradable. It may come as some surprise to learn that the driving force behind this renewed enthusiasm is not UK borne.
Interestingly although 'with profit' endowment policies are bought in the UK the majority are then sold overseas. Confused?
|Endowments previously accepted||Endowments newly accepted|
|Britannic Assurance||Eagle Star|
|Clerical & Medical||Friends Provident|
|Co-Operative||Guardian Financial Services|
|Commercial Union||Legal & General|
|Equity & Law||Royal Life|
|General Accident||Standard Life|
|Liverpool Victoria||Scottish Amicable|
|National Farmers Union||Scottish Equitable|
|Norwich Union||Scottish Friendly|
|Royal Liver||Sun Alliance|
|Sun life Wesleyan|
Source: 1stPolicy May 2008
With profit endowment policies are actually held in high regard on the continent the main reason for this is that they have been somewhat shielded from the negative publicity that they have suffered here in the UK.
The second reason is that interest rates are lower than they are here. For instance a UK Saver is able to enjoy an interest rate of 5% and above from either a bank account or building society. Whilst a saver in Germany might be lucky to get more than 2.5%.
Therefore endowments remain competitive when compared to savings rates. In fact they have proved so popular that huge funds have sprung up over the past few years which invest heavily into this product.
These funds are not to be underestimated; a typical fund might contain ?50m pounds worth of traded endowment policies known as (Teps).
These large funds attempt to smooth investment performance by purchasing policies from a variety of Life Offices as well as purchasing policies with varying maturity dates.
This has the knock on effect of enabling the British side of the business to purchase a broader range of policies from the open market. The table below gives a rough outline of the types of policy which are now saleable. The companies on the right represent Life Offices that the majority of Market Makers were previously unable to buy.
Increased demand generally translates to increased prices and this market is no exception, which can only be regarded as good news from the policy holder's perspective.
Obtaining a quotation is a relatively pain free exercise these days. Nearly all the Market Makers, as they are known, offer free on-line valuations. In fact to save time policy holders are actively encouraged by the Life Offices to submit their policy details directly on to the APMM website (Association of Policy Market Makers).
The APMM then in turn distribute the details between their six member companies. The policy holder is then able to make and informed decision who to sell their policy to depending on price and estimated transaction time.
It should be pointed out that Market Makers operate strictly on an execution only basis and if any advice is sought the policy holder should look towards the services of a Financial Adviser. Further information can be obtained by contacting the APMM at www.apmm.org.uk
Paul Harrison is sales and marketing manager of 1stpolicy Company www.1stpolicy.co.uk one of the member companies of the APMM.