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Firstly "What is an
endowment policy?".
An endowment policy is
made up of two quiet separate parts:
Part 1. Its a life
assurance policy for a set amount of money, which means that if you
die before the policy end date, it will pay out a lump sum and that's
the end of it. No more monthly (or perhaps, annual) premiums to pay
and no money at the maturity date, because it has already paid out the
amount it was contracted to do.
Probably the most
common use of an endowment policy is to protect the money borrowed as
a mortgage from a bank or building society. If it is set up to protect
a mortgage, then the mortgage lender can have the mortgage paid off in
one large lump sum payment.
Part two. This is the
investment element that is designed to grow into a targeted amount by
the time the policy comes to its fruition, known as the "maturity
date". Now the investment usually falls into one of two types, but can
be a combination or merger of both types (which is less common). The
two types are "unit linked" and "with profits" and they differ in how
the money is invested and their relative risk when compared against
each other.
Once an amount of
money has been deducted from the monthly premium to cover the cost of
that months life assurance, the remainder is used to either :
(a) purchase units in
a set fund (or spread of funds) which fluctuate, very similar to stock
market fluctuations, and build up in number as the years go by, until
eventually there is a significant holding of them which can then be
cashed in to produce a lump sum (to pay off the mortgage debt, for
instance). The value of the individuals policy is therefore calculated
as the unit price on the day multiplied by the total number of units
held.
or
(b) invested, along
with every other policy holders amounts, into the "with profits fund"
which is actively managed and spread over a variety of
investments in order to attempt to reduce the policy holders exposure
to risk, and deals with individual policy holders in a totally
different way.
Basically, as the life
assurance company makes profits each year, so it allocates a certain
amount of these to the individual policy holder in the form of a
"reversionary bonus".
It's an amount that is
added back into the policy, and once added cannot be taken away again,
so like a ratchet, can only go in one direction.
Theses policies also
have what's called a "Guaranteed Basic Sum Assured (GBSA)" or
similarly phrased part to the policy, and it is an amount that is
guaranteed to pay out at maturity no matter how well or badly the
overall fund performs.
The annual
reversionary bonuses are added to the GBSA each year and so the value
builds. Think of it as a block or brick wall that starts out say 10
courses high (the GBSA) and has more bricks added each year (the
reversionary bonuses) cemented into place so they cant be removed, and
so it grows in height (or in the case of the with profits endowment
policy holder - volume and value)
Then, in the final
year, provided the policy holder has kept up with all the premiums,
the life company can then add on a further final bonus (called a
terminal bonus) as a "thank you" for staying the course all the way to
the end.
Now
........ here's the important bit for anyone thinking of cashing in
their policies or selling them to an endowment trader !
1. Traders do not
buy unit linked policies, and the value you will get back from the
life company if you cash the policy in is the number of units you've
got multiplied by the value of the units at the time the company
cashes them in, so timing is important for you!
2. Second hand
endowment traders will only buy with profits endowments, and only then
if they think the bonuses will continue to accrue and hope for
significant terminal bonus to top it all off. If they think otherwise
they simply wont make an offer to buy. Oh, and a bit like the
"Goldilocks Effect" the policy mustn't be too young or too old or with
the wrong life company - just the right age, with one of the favoured
life companies, and with a good bonus profile, and it can attract
buyers !
If the policy holder
decides to cash in their with profits endowment policy (rather than
attempt to trade it) the life company can (and probably will)
apply what's called a "Market Value Adjustment Factor (MVAF)" to
reduce the payout. Its a punitive measure in order to protect the with
profits fund so that it does not get stripped too seriously and effect
the ability to apply bonuses to the policy holders that decide to
remain in the fund.
So, to sum up ......
if you are considering trying to trade a unit linked endowment policy
you will be wasting your time. If you have a with profits endowment,
be prepared to receive no offers from traders for your policy if its
the wrong "flavour of the month" at the time.
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Selling endowments for more than the surrender value to traded endowment buyers
Selling endowments the quick and easy way
Selling endowments for profit
Selling Endowment, Equity House, Hatherley Road, Cheltenham Gloucestershire GL51 6HF
