Most life companies will alter the term of a policy free or for a small charge, and it is worthwhile for investors to explore this option if they want to sell rather than surrender a policy to the insurer that supplied it. At a recent auction, Johnson Fry Securities, the investment house, sold a Friends Provident policy for nearly 60 per cent above surrender value after its term had been reduced by nine years.
The most common alterations to a policy are to reduce the term of the plan (in other words to bring forward the maturity date) or to raise the monthly premiums paid. Both can enhance the value. The table shows the effect of alterations to three policies.
"It is only fair that any extra value in a policy as a result of alteration should go to the seller of the policy and not fall into the lap of a market maker in secondhand policies as a windfall profit," said Jack Tenison, a director at Johnson Fry Securities.
"Unfortunately, not all investors are aware of the impact of alteration and whether they are being offered a price which reflects the policy's true value."
Altering a policy is not an issue only if a policy is being sold. Many people surrender their policies because of changing financial requirements, when they might have done better to keep them and alter the terms. Often life companies will offer a choice of altered terms.
The one alteration that has only a minimal impact on policy value is the reduction of death benefit or life cover. Low-cost endowments, in particular, may have a relatively high death benefit but this is of little interest to purchasers of secondhand policies, who just want a stable investment. Most auctioneers and market makers in secondhand policies will strip out excess life cover to increase the amount of premiums going into the endowment policy. But life insurance is generally cheap, and only where the death benefit is extraordinarily large will its removal significantly affect the investment value of the policy.
A note of caution. Depending on the terms, altering a policy may make the policy "non-qualifying" for tax purposes.
All endowments initially qualify for tax relief, which means they mature, or can be sold, free of tax. But they may lose this relief if they are altered in certain ways, particularly if the term is reduced to less than 10 years from the date of alteration.
Some life companies will not alter a policy so that it becomes non-qualifying, but other companies will if the policy holder understands the consequences.
"The important point is that investors should not make a policy non-qualifying," said Mr Tenison. "If they want to keep a policy, any alteration should retain the policy's tax-qualifying status. If they want to sell it, they should get a quote for the alteration and sell it at a price that reflects its altered value, but they should not make it non-qualifying themselves. If they do, they may be liable for tax on the sale proceeds of the policy."
At the secondhand stage, all endowment policies become liable for tax. So the auctioneer, market maker or investor should request the alteration is made without penalty or loss of relief. Mr Tenison says that for some investors, depending on their tax position, non-qualifying policies may be more attractive.
Just because a life firm alters terms, it does not necessarily make the policy more valuable. About a quarter of all policies are altered, and Royal Life and Scottish Amicable policies, for example, rarely gain. If there have been too many, say, Friends Provident policies with terms shortened to end in 1999, there may not be enough demand.
That said, Friends Provident, Scottish Life, Clerical Medical, Pearl, Scottish Widows, and Norwich Union are the life offices most likely to raise the value of a policy by alteration, and they account for half the policies available for sale. Mr Tenison said: "With these sorts of numbers, it is worth checking if a policy is suitable for alteration, and if so, asking for a proper price, before allowing your policies to be sold to the first offer or surrendered back to the life office."
Effect of alterations on policies from three life firms
Standard Life Friends Provident Norwich Union
Before After Before After Before After
Estimated price pounds 7,550 pounds 10,100 pounds 3,271 pounds 4,865 pounds 2,450 pounds 3,350
Monthly premium pounds 37.10 pounds 60.18 pounds 71 pounds 71 pounds 28.71 pounds 100.42
Maturity date 2008 2004 2013 2000 2011 2000
Increase in value 33% 49% 37%
Source: Johnson Fry. Tel: 0171-321 0220