Endowment policies often do not perform as well as people hope. If yours has not, you might be thinking about cashing it in and cutting your losses - but is this a good idea?
You do not necessarily have to wait until maturity to cash in your endowment. Here is all you need to know to decide what to do with your policy.
Find out about your endowment policy
Who provides your endowment policy?
You should have some paperwork to tell you who provides your endowment policy. This will probably be with the paperwork for your mortgage if it was taken out alongside it.
If you cannot find any paperwork, check your bank statement. Endowments are regular investment plans, and you will usually be paying a monthly sum to an insurance company for it, which will appear on your bank statement.
Failing this, then you should go back to whoever sold you your mortgage and ask that company to tell you which insurance company's endowments it was selling at the time you got your mortgage. You can then call this company to get some details on your endowment.
What type of endowment policy do you have?
There are different types of endowment policy: with profits, unit linked, non-profit and whole of life.
You will need to ask your endowment provider what type of policy you have if you cannot work this out from your paperwork.
Non-profit endowment policies
Non-profit endowment policies do not provide a sum of money above the amount you need to pay off your loan; it will basically grow to meet that payment, and nothing else.
You will also have life insurance as part of this policy, which will be equal to the amount of mortgage you have to cover. The only benefit of a non-profit policy over a with profits endowment is that the premiums you pay will be lower.
What is a whole-of-life endowment policy?
Whole of life endowments refer to the life insurance element that is usually sold as a separate part of the policy.
This will insure you for the whole of your life, rather than a specific term. Most people set up the policy to pay off their mortgage if they die before it is paid off.
What is a with-profit endowment policy?
With-profit endowment policies generally promised a lump sum that would pay off your mortgage at the end of the term plus a little over that you could use as you wished.
These plans were the subject of the endowment mis-selling scandal because of the way the policies work and the 'promises' the salesmen made when people took them out.
You cant be sure that your endowment will reach a certain value at maturity as nothey are based entirely on the performance of the underlying fund.
When does your endowment policy mature?
Endowments are essentially investment plans which are designed to give you a lump sum at their maturity, which can be anything from five to 25 years.
If you got your endowment to run alongside your mortgage, then the chances are you have as long to run on your endowment as your remaining mortgage term. You should be able to find this out from your latest annual mortgage statement from your mortgage provider.
If you have an endowment as a standalone savings plan, then you will need to find the paperwork, or ask your endowment provider to find out how long is left on the plan.
Understand your options
There are three main ways to cash in on an endowment.
You can wait for your policy to mature, surrender your policy to your insurer, or sell your endowment to a traded endowment policy market maker.
You will need to find out what each option entails and then judge which will earn you the most money:
Should you wait until your endowment policy matures?
Your endowment policy will have a maturity date that was set when you started it. You can wait until then to receive the money due but you will need to keep paying into it until then.
What does endowment surrender involve?
You can sell your policy back to your endowment provider in exchange for a lump sum before it matures. This is known as endowment surrender.
To find out how this works, read our guide: What is Endowment Surrender?
How do you sell endowment policies?
You might be able to sell your endowment policy in the Traded Endowment Policies (TEP) market.
This matches people looking to sell their endowment policies with people who are looking to buy them.
This can generally get you a better price because the policy will continue in its existing format, but it will simply be reassigned to a new owner, and that person will take over the payment of the premiums. In return, you will get a cash lump sum.
Do you still need your endowment policy?
Cashing in your endowment policy is not always the best option, especially if you were relying on the funds to clear other debts, so you need think carefully about whether they are still needed.
Can you still pay off your mortgage if you sell your endowment?
If your endowment policy was taken out to pay off an interest-only mortgage at maturity, cashing it in means you will no longer have that investment vehicle in place. So you will need to be sure you can still pay off the loan in full at the end of the term.
You could change your mortgage onto a repayment basis, meaning you are guaranteed to own your property when your mortgage comes to an end. However, you will end up paying more on your mortgage each month as you are repaying the loan, not just paying off the interest. Read our guide: should you get an interest only or repayment mortgage?
You could also keep your interest only mortgage but use another investment product like an ISA to grow alongside your mortgage. It is important to seek financial advice if you want to go down a route that involves alternative investments.
How else could you pay off your mortgage?
Check if you have any other investments that could be used to pay off your mortgage at the end of its term, whether they were taken out at the same time as the mortgage or not.
You may want to consider using your savings to pay off some or all of your mortgage, especially if you are paying more in interest on your mortgage than you are earning on your savings. Read our guide: Should I Use My Savings to Pay Off My Mortgage?
Alternatively, if you receive bonuses from your employer, or you are expecting an inheritance, you could use this to pay off your mortgage rather than using a fund to pay it off at the end of the term.
You need to be confident this will work though; otherwise you could find that you need to extend your mortgage or face the prospect of losing your house if you cannot pay off the loan at the end of the mortgage term.
Should you surrender your endowment?
If you are considering surrendering your endowment, then you need to ask your insurer for a surrender value. You can ask by phone but should also ask for it to be sent to you in writing too.
You should also find out what the projected value of your endowment would be at maturity, as this will give you a better idea of whether to surrender the endowment now or keep it until maturity.
You should also find out:
The terminal bonus, which is a non-guaranteed amount paid on closure that can sometimes make up more than half of an endowment policy's maturity value.
Surrender penalties and charges, which can sometimes be high enough that you get less back than you actually paid in. They can be charged for trading in the endowment sooner than you originally agreed.
Most endowment policies have an anniversary that will enable you to exit the policy early with no penalty. Usually this is at the 5 or 10 year point, so check your paperwork or with the provider directly.
Should you surrender your policy?
Once you know the surrender value, the proportion of the maturity value that would consist of the terminal bonus and whether you would incur any charges upon surrender, you need to think about whether you are better off sticking with your endowment, selling it or surrendering it.
It may not be a simple decision, so you might want to get some advice from an independent financial adviser.
Should you sell your endowment?
Get valuation quotes from endowment buyers
You should speak to the policy market makers to find out what you would be offered for your policy in the traded endowment policy (TEP) market.
You only need to pay fees to sell your endowment if it is through an auction house, when commission is charged.
How much will you get when you sell your endowment?
Once you have several quotes, have checked fees and worked out which company will give you the best return, you need to work out how much you'd make if you sell.
You would need to take the quote you were given by the endowment buy, and deduct any commission or fees. This is the amount that you would receive from the sale of your endowment.
Once you have valuation figures for the amount you would receive if you sold, surrendered or kept your endowment, you need to compare your options to see which will give you the most money.
Cash in your endowment policy
If you decide to cash in your policy now, instead of waiting until maturity, here is what you will need to do:
Sell your endowment
You can get quotes from a number of companies through our selling endowments comparison, and they will get back to you with details of what they can offer.
You would then need to get in touch with the endowment buyer that has given you the best offer for your policy, and fill in an application form.
Some companies will sell the policies directly to an investor, which can delay the process a little, while others want to keep a pool of policies so they can offer policies to investors more easily.
You should have the money once the legal assignment has been completed, and the policy is no longer in your name.
Surrender your endowment policy
If you decide to surrender your endowment policy, you will need to ask your insurer to send you the relevant forms.
It may be wise to get advice on surrendering your endowment from an independent financial adviser before you do to avoid finding out that you've made the wrong decision further down the line.
What should you do once you have cashed in your endowment??
Once you have sold or surrendered your endowment and have the funds to hand you will need to consider how best to use them.
The most obvious choice is to put the money towards your mortgage, especially if you can do this without penalty. Read our guide to decide if this is worth doing: Should I Overpay on My Mortgage?
If the amount you raise through the sale of your endowment is not sufficient to clear your mortgage completely but still knocks a significant amount off your outstanding it may be the case that you are able to remortgage to a better deal that will save you more money in the long run.
Alternatively, you could invest the proceeds in stocks and shares, bonds, savings accounts or property - whatever you think will give you the best return.
Whether you sell or surrender your policy, your life insurance now will not pay out if you die, so you will need to consider arranging a new life insurance policy.