No surrender

Trading insurance policies offers real returns

T he traded endowment market, which buys and sells second-hand endowment and with-profits insurance policies, provides a real alternative for investors. You need the money to buy a policy and maintain the premiums until it matures, but as the buyer you get the accumulated bonuses and the terminal bonus on the policy. The profit is subject to capital gains tax, but this can be minimised by buying several policies maturing in different years.

Only policies with at least six or seven years on the clock, and between six and 15 years to maturity, are really tradable, but selling a policy secures an average 33 per cent better price than simply surrendering it to the insurance company, and still leaves an attractive return for buyers, according to Max Rosen, managing director of SEC, one of half a dozen member firms of the Association of Policy Market Makers.

But exactly what you get when your second-hand policy matures depends on how well the insurance company invests your premiums, on the annual bonuses it adds to the value of the policy you have bought and on the size of the terminal bonus it awards.

The risks are much the same as if you buy a brand-new with-profits endowment policy to pay off your mortgage, but the time-frame is shorter and as the maturity date gets closer the importance of the terminal bonus rises, especially if the policy is issued by a company like Scottish Amicable that traditionally pays a high proportion of its total bonuses as a terminal bonus.

Two years ago it was possible to buy policies that provided a prospective return of 13 per cent, but the average yield has dropped back to around 11 per cent, and the return on some policies has fallen even more sharply, reflecting the increasing difficulties insurance companies face in getting high returns in an environment of low inflation, and the poor performance of markets in 1994 in particular.

A portfolio of policies maturing over the next 10 years that was valued at pounds 509,000 two years ago was recently revalued at pounds 394,000. Market-makers claim, however, that it is still possible to buy a policy for pounds 10,000, maintain premiums of say pounds 50 a month for the next five years and receive a final return of pounds 25,000 to pounds 28,000 depending on the size of the terminal bonus.

For pounds 5,000 it should be possible to buy a policy, pay premiums of just pounds 20 a month for 10 years and end up with a lump sum of pounds 25,000.

These days you could also buy a policy issued by a company like Norwich Union or Friends Provident that could turn into a limited company and pay a premium to policyholders as a sweetener to approve the change.

According to Mr Rosen, the price of such policies has not risen significantly, but they sell a great deal faster than some of the others.

Clifford German