Personal Finance: Adopt a policy of no surrender

Between 50,000 and 60,000 investors who sell their with-profits plans back to insurers early do better on the TEP market. But life offices seem reluctant to advise their customers of this. Nic Cicutti reports

Market-makers in traded endowment policies (TEPs) want life assurance companies to tell customers about the existence of the second-hand endowment market.

They say that people who surrender their policies early, rather than waiting for them to mature, might easily do better by selling them on to a new owner. According to Christopher Dobie of Beale Dobie, a policy market-maker, prices on the second-hand market are, on average, 15 per cent higher than the often pitiful surrender values offered by life companies.

For people who buy the policies, the average rate of return is 10 per cent a year, using 1997 maturity values as a guide. But few companies alert policyholders to the existence of the market. Only two - Norwich Union and Clerical Medical - routinely inform all policyholders wishing to surrender policies of the TEP alternative, says Tim Villiers, director of the Association of Policy Market Makers (APMM).

Clerical Medical includes the APMM's telephone number in the literature sent to surrendering policyholders; Norwich Union sends the association's brochure, which lists policy market-makers and details the types of policies in which they deal.

Other companies will sometimes reveal the information on a pot-luck basis - depending on which person deals with the surrender request, or make vague reference to the existence of the market in the small print.

Some, notably Standard Life, are wary of TEPs and will only acknowledge their existence to people who specifically ask for information. "We have some concerns about this market," says Andrew Black, marketing manager. "It's not really an issue for the seller, who may indeed get a good price. But there is evidence that people who buy them are paying quite considerable premiums to their real value."

Mr Black concedes that this may be partly due to the perceived additional appeal of policies from mutual insurers - of which Standard Life is the largest - to carpetbaggers ("although people who say we're a likely candidate for conversion don't know what they're talking about").

But the main cause for concern is that second-hand prices relate to past payouts, rather than reflecting the likelihood of lower payouts in the future, Mr Black says.

"This depends on where you think the responsibility lies," counters Mr Villiers. "If the payout is less than the asset-backing of the policy, does the moral duty of the life office not lie with the original policyholder? The most common reason for them deciding to sell is because they need the cash. The companies should make sure they get as much as possible."

Mr Villiers also dismisses Mr Black's claim that the policies are too expensive. "They get a jolly good return, especially considering it is such a safe investment."

Policies suitable for sale on the second-hand market should be at least five years old and have a surrender value of at least pounds 1,000.

According to Mr Dobie, the value of traded policies has jumped from pounds 5m to about pounds 250m over the eight years since Beale Dobie entered the business. But research by his partner, David Beale, indicates that as much as pounds 800m-worth of the policies offered for surrender each year would do better on the second-hand market.

This means that between 50,000 and 60,000 of the people surrendering direct to insurers would do better to sell to new policyholders, he says. "But most people surrendering aren't financially acute. About 85 per cent of all endowment policies are sold to support a mortgage and they are often their holders' only investment.

"The only solution we can see is for the companies to tell them. Every life office knows whether they would do better on the traded endowment market, but they don't say so. We've been saying to life offices for ages - at least two years - 'Come on chaps; why not tell people?' But, far too many do absolutely nothing."

"We've obviously got a vested interest in keeping the policy going," says Liz Watson of Norwich Union. "But we are also keen to look after the interests of all policyholders, including those wishing to surrender."

The Association of British Insurers gives information about the second- hand market in its free leaflet on surrender values, but says individual life companies must make up their own minds.

The Association of Policy Market Makers: 0171-739 3949; Beale Dobie: 01621 851133; ABI: 0171-600 3333.

This article first appeared in 'Bloomberg Money' magazine.