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Endowment policies

Many people who have an endowment mortgage and fall under financial pressure simply cash in their investment plan… and in many cases lose out financially. However, there are numerous other options and the company offering your endowment should outline them for you.

Trading in an endowment plan

This involves you selling the policy on to a third party - essentially a specific traded endowment company. The new owner of your endowment policy will take over the repayments and pay the premiums. The assurance, however, remains on the life of the previous policyholder

When the previous policyholder dies, the new owner receives all or part of the money. In some cases, trading your endowment policy can be the most viable financial option.

But before you take this step it is worth taking advice from both the company that offers the plan and from an independent financial adviser. The firms that advise on this are regulated by the Financial Services Authority.

Surrendering an endowment policy

Most endowment policyholders surrender, trade or cash in their policy before the end of the full term. Reasons for this include dissatisfaction with the policy, need to generate capital, change of mortgage or divorce. Although common, surrendering your policy should really only be undertaken as a last resort.

Most with-profit endowments grow quickly near the end of their term, particularly if there are terminal bonuses. Cashing in by surrendering the policy can lead to a greatly diminished sum, and you may be charged 'early surrender penalties'.

Surrendering (which is usually not an option until a set qualifying period is reached) simply means realising the value in the policy and stopping to pay premiums. The contract of the policy then ceases, as do all benefits.

Selling an endowment policy

Many people are unaware that this is even an option. A traded endowment policy is a with-profit endowment plan sold by the original policyholder to another investor. The endowment policy is then legally assigned to the investor, who takes responsibility for the premiums.

The life assurance element remains the same, but the benefits are paid to the new holder. The potential advantage in this is that you could get more for your policy than you would if you sold it back to the original issuer. The price obtained on the policy market could be as much as 35% higher than the surrender value, although experts estimate that on average it is approximately 15% higher.

Many investors regard these products as low-risk investments and some believe they compare favourably to others of a similar type. As a result, there are many people and organisations willing to buy second-hand.

Other options

Hanging on to you endowment. Generally, those endowment policies that reach maturity perform well for the policyholder. Unless there is no other alternative, it can be worth holding on even if the policy seems to be under-performing.

Loan-back. A loan-back facility allows you to solve cash-flow problems by borrowing from the insurer. The loan will be secured against the policy and must be paid in full with the final proceeds of the policy.

Paid-up policy. This occurs when no more premiums are paid into the plan. Cover remains, but the charges are deducted from the value of the fund. The value of your fund will gradually decrease over time, until no further benefits are payable. Any surplus funds left when the policy matures are paid to you.

Premium holiday. A premium holiday allows the policyholder to take a break from paying off the premium. In order to establish whether this is a possibility, you must speak to your insurer or life office.

Lender Initial Rate Duration Standard Rate Overall Cost For Comparison Max Loan To Value Fee
2.59% 2 years 5.69% 5.4% APR 75% £999
2.69% 2 years 4.99% 4.9% APR 75% £495
2.94% 2 Years 5.69% 5.4% APR 75% £199
2.99% 2 years 4.99% 4.9% APR 85% £495
2.99% 3 years 4.99% 4.6% APR 70% £499
3.0% 2 years 5.69% 5.5% APR 80% £999
3.19% 5 Years 4.79% 4.2% APR 80% £995
3.35% To Jul 2014 4.95% 4.6% APR 75% £999
3.5% 2 years 5.49% 5.1% APR 75% £595
3.84% 2 years 3.94% 4% APR 90% £499

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