These policies take an average of seven years to be worth more than you have paid in. They are incredibly expensive to set up because they pay out very generous commission to the person selling the policy - which explains why so many homeowners have endowments.
These policies only become saleable after seven years, when the charges have been paid. At this point, a savvy investor can swoop in and pick up a policy. As a buyer, you carry on paying into the endowment until it matures. It grows every year - current rates are about 6 per cent. At the end of the term, you get a terminal bonus, which can make up half of the total return.
Trading endowments is not a new idea. People have been doing it for more than 150 years, initially through auctions. In the late 1980s, a number of companies called "market makers" set up a market now worth pounds 300m a year.
Many people who fall on hard times aren't aware they have a choice and simply give the policy back to a life insurance company. If you are thinking of giving up your endowment, you should get considerably more money by selling to a market maker - around 12 to 15 per cent more.
"As the maturity date is known in advance, a second-hand endowment is useful when planning for future cash needs - say in three to 10 years - for school fees, a graduation or wedding costs. And policies with a longer term to maturity may be attractive to people with small pension plans because of the low-risk and steady-growth elements," says a Leeds- based financial planner, Francis Klonowski.
An alternative way to invest in second-hand endowments is through an investment trust. Simon White, head of investment trusts at Dresdner Global Investors, explains that you get the benefits of a spread of second-hand endowments.
There are two factors to consider before you buy: the price of policies and the payouts. Investors may now be paying over the odds for second- hand policies because they are so popular. If you buy one for 10 to 15 per cent more than the quoted surrender value, you could probably find a better investment elsewhere.
A review of endowments by the Faculty & Institute of Actuaries has found that the lump sums they produce at maturity are likely to fall by at least 5 per cent a year. That means over the next 15 years, the payout you can expect from a 25-year, with-profits policy is likely to halve. Mr Klonowski recommends policies near maturity date. Older established plans have produced annual returns into double figures as a result of higher bonus rates in the late Seventies and Eighties.
Call the Association of Policy Market Makers on 0171-739 3949 for information about second-hand endowment policies and market makers.