Endowments are meant for the long term - anything from 10 to 25 years. Very long policies are typically tied to mortgages and designed to pay off the capital outstanding when you have finally made your last monthly interest payment. The big drawback is the hefty charges in the early years. It is far better not to buy a policy if you are worried you might not be able to keep up repayments. You will get back less than you have paid in premiums.
Yet in some cases, especially when you buy a second-hand policy, it can still be a good idea as an investment. And if you do have an endowment, and for some reason can't carry on repayments, you have several options. One is to leave your money to sit there quietly growing for the next 20 years. On the other hand, if you need cash now you could get a good price for your policy. Even lapsed policies are saleable.
The market for second-hand endowments is driven by investors who realise they are good value. The original owner has paid the bulk of the charges, so the policy is now attractive.
If you are a seller, you will find that the life office offers you a "surrender value". This is the amount of money the company will give you back if you decide to pull your money out early. This is different for each policy, depending on how much you have paid in, over what time and how much longer the policy should have to run.
Many people are shocked at how low surrender values can be. You can get a better price quite easily on the open market. Some 60,000 endowment sellers a year miss out on an average of pounds 1,478 on top of their surrender value because they give the policy back to the life office, rather than selling at auction or to a market maker.
A policy for sale must be "with profits" and have run for at least one- quarter of its life, and it should have a surrender value of more than pounds 500. Several companies buy and sell endowments, so you can contact them as an investor or as a seller (see below for details).
Foster & Cranfield is the only policy auctioneer. Millions of pounds worth of policies are sold every month at auctions around the country.
The alternative is to go through a policy dealer (market maker). These companies purchase policies and then sell them, matching supply and demand. All companies will send you lots of information about investing in endowments, plus lists of policies for sale. The Foster & Cranfield web site has general information on selling and buying endowments and lists of policies coming to auction, with reserve prices.
Some policies are more saleable than others. If you are thinking of buying an endowment, you are in good company. There are now six investment trusts buying second-hand endowments, and all trade near to their net asset value - the value of the underlying assets.
A growing number of people buy endowments for their Self Invested Personal Pension (SIPP) portfolio and for other retirement planning schemes. There are also foreign buyers from low-interest-rate countries such as Germany.
A tip for buyers is to look at with-profit funds from mutual organisations such as Scottish Life, Scottish Provident and Scottish Widows. As mutuals have no shareholders, all the profits go back to the policy holders. And that means anyone who has a with-profits policy. Extra income could make its way to your fund from what are called "reserves".
As a with-profit holder, you could gain from the profits made by other areas of the company's business. A good example is life cover. In the 1980s, the perceived threat of Aids was much higher and policies were priced high to cover the potential risk. As fewer payouts were made, the excess funds will return to with-profit holders.
Mutuals are also diversifying their businesses. Standard Life recently set up a new postal savings arm that has taken in more than a billion pounds. Profits from that venture will be going straight to the with- profit fund.
Standard Life has also set up an investment arm to tackle the giant institutional pensions market. The company wants to run pension funds for large companies and local authorities. Again, the profits will find their way to your fund.
The second-hand endowment market is buoyant, even if policy holders who want to sell do not always have the best information to hand.
Get a list of firms trading in second-hand policies from the Association of Policy Traders on 0161-736 1919 or the Association of Policy Market Makers on 0171-739 3949.
Contact Foster & Cranfield on 0800 0720269 or www.foster-and-cranfield.co.uk Money Marketing's annual Focus Survey gives performance statistics for all endowments. It costs pounds 4.95. Call 0171-292 3730.
Bill Weston is managing director of Foster & Cranfield.Reuse content