Instead of surrendering an unwanted endowment policy, selling it to a third-party investor can help you reduce your losses.
You may have heard about endowment plans, which is an insurance product designed to help you save money over the long term - commonly over 15 to 25 years. Most endowment plans also feature an option for you to withdraw a specified amount of money during the policy term.
Endowment plans are commonly referred to as ‘savings plans’, but they are not the same as a bank savings account. For one, you cannot stop depositing money (paying premiums) during the policy term. For another, if you need to withdraw your account in full before the stipulated number of years has passed, you will lose a portion of the funds you have put in.
Stopping premiums or withdrawing your endowment plan before maturity will cause you to surrender your policy, which will make you lose money. If you need to stop your policy early, consider selling it to third party investors to help dampen the losses you suffer.
Why Do Endowment Plans Lose Money When Surrendered Early?
First, let’s understand why surrendering an endowment plan early results in losses.
Like any regular-premium insurance plan - i.e., an insurance policy that requires regular payments - an endowment plan is constructed on a ‘front-loading’ basis. In other words, the premiums you pay are used to pay commissions and other costs first, before being used to accrue value.
Note that insurers are free to choose how they will pay out the accrued value; they are not held to a specified payout schedule, only that the accumulated value is paid out by the time the plan matures (as specified in your policy contract).
To encourage you to service your endowment plan as long as possible, insurers tend to hold back the accumulated value of your plan, paying it out only during the last few years before maturity.
As a result, you’ll notice a common thread running through all endowment plans (and indeed, all regular premium insurance plans) - there is little to no accumulated value during the first few years, with the numbers in the ‘guaranteed returns’ portion increasing dramatically during the last few years.
What this means is that the earlier you surrender your endowment plan, the more money you will lose.
Are Endowment Plans Guaranteed to Make Money at Maturity?
For the sake of completeness, it should be noted that holding your endowment policy to maturity doesn’t guarantee you’ll make a profit, or even break even.
You see, your endowment plan returns comprise a ‘guaranteed’ and a ‘non-guaranteed’ payout. The ‘guaranteed’ payout is usually lower than the sum total of your paid up premiums, whereas the ‘non-guaranteed’ payout is meant to make up for the remainder, plus profits.
Because a portion of your returns is not guaranteed, you may end up getting back less money than what you paid in total.
For this reason, you should always check what your ‘guaranteed returns’ are against the total premium you need to pay, and decide if you can absorb the loss in the event that your ‘non-guaranteed’ returns are that severely affected.
You can also check the historical performance of the endowment plan you are interested in, but bear in mind that past results are no guarantee of future performance.
In case you're alarmed that endowment plans sound risky, don't be. The likelihood of your 'non-guaranteed' returns dropping to zero is slim. Just be aware that endowment plan payouts are structured that way.
What’s the Advantage of Selling My Endowment Plan?
If you are unable to continue paying your premiums, you will be forced to surrender your policy. Should this happen, you will only get back the ‘surrender value’ of your policy, which is a portion of the premiums you’ve paid to date.
As explained above, this is often heavily skewed against you, the policyholder.
However, there is an alternative to surrendering your policy. You can choose to sell your endowment plan to a third party investor.
A third party investor can offer a higher payout for your immature endowment plan that is more than the surrender value offered by your insurer. In this way, selling your endowment plan is more advantageous, as you can recoup a greater portion of your loss.
How much you can get for your endowment plan depends on several factors. Search online for “resale endowment policy” to find vendors who offer no-obligation, no-cost quotations to help you decide who to sell your policy to.
What Happens After I Sell My Endowment Plan?
When you sell your endowment plan, your policy is transferred to the party you sold it to.
This means that while you no longer have to continue paying the policy premiums, you will also lose any coverage or benefits that were included in your endowment plan.
Although endowment plans are designed primarily for savings purposes, they do offer a death benefit at the very least. Some endowment plans are also able to carry riders, which offer payouts in case of critical illnesses, hospitalisation or accidents.
For this reason, you should make sure you have adequate protection before selling your endowment plan.
When Should I Sell My Endowment Plan?
It bears repeating here: as a rule, you should not give up your endowment plan, as you are virtually guaranteed to lose money if you do.
If at all possible, strive to maintain your endowment plan. Contact your financial adviser to discuss your options, such as withdrawing a portion of your policy’s accumulated value to pay for your premiums.
However, you should not borrow money or get into debt to keep up with your endowment plan. The interest you’ll need to pay on your debt is guaranteed to be much higher than the returns provided by your endowment plan.
With that in mind, you may want to consider selling your endowment plan under the following circumstances:
- An emergency requiring immediate funds
- Unexpected relocation or migration
- Opportunity to invest funds in better-performing investments
- Repayment of debt
Remember, selling your endowment plan only allows you to make the best out of a bad situation. You will almost never make money terminating your endowment plan early, whether you sell it or not.
Keep in mind that endowment plans are created for long-term savings, and you should always check that you can commit to the full policy term before signing up.
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By Alevin Chan
A Certified Financial Planner with a curiosity about what makes people tick, Alevin's mission is to help readers understand the psychology of money. He's also on an ongoing quest to optimise happiness and enjoyment in his life.