Selling A Commercial Union Endowment Policy (F.S.A. Guide )

THOUSANDS of people cash in their endowment* policies every week, fed up with falling returns and warnings that their mortgage won't be repaid. But cashing in isn't always the right decision. Here are the questions you should ask before waving your endowment goodbye.

WHAT is the endowment supposed to be doing?
PRESUMABLY, repaying your mortgage - and it's probably failing. Payouts will continue to fall, and if you have not made arrangements to plug the shortfall you should do so immediately. But that doesn't mean cashing in your endowment will always be the best option.

BUT why keep it if it's not going to pay off my mortgage?
SOME policies have a mortgage promise. A few guarantee to repay the whole mortgage while others will top up your endowment to certain levels without actually promising to cover the whole mortgage - though some have conditions attached. They include Standard Life, NFU Mutual, Wesleyan and Norwich Union's funds including Commercial Union and General Accident.

WHAT are the dangers of cashing in a policy?
YOU could trigger a tax bill. Endowments enjoy a special tax status, but only if you keep them running for at least three-quarters of the policy life and a minimum of ten years. Higher rate taxpayers who cash in early could be liable to 18% tax on profits (the difference between basic and higher rate tax). People whose endowment was taken out before April 1984 also benefit from tax relief on premiums.

WHAT about life cover?
YOU'LL lose your life insurance, so it's vital to get new cover for your mortgage before cashing in. If you have suffered from certain illnesses you may not be covered by a new policy whereas your endowment will cover you. New life insurance could be more expensive because you will be older. However, insurance rates have fallen so some people could actually re-insure more cheaply.

ANY other reasons for keeping the policy?
THIS might sound unbelievable, but in some cases you could have a reasonable investment. Some older policies with strong insurers should make reasonable payouts. Remember that nearly every stock market investment has lost money in the past four years, so it's not surprising that payouts are falling.

WHAT has all the fuss been about?
MANY endowments are saddled with poor management and high charges. They have been mis-sold to people who did not need life insurance, were too old to be swapping to a stock market investment or who did not understand the product. Greedy salesmen encouraged people to tie their mortgage to these products that were little more than stock market gambles.

WERE they good or bad?
AS A pure investment smoothing out stock market up and downs some have worked. But as a mechanism for repaying a mortgage most are abject failures. Some insurers have also poisoned them with hidden charges.

HOW can I judge if my endowment is worth keeping?
ASK a good independent financial adviser* (IFA) - but they may be reluctant to tell you to sell for fear of being accused of giving bad advice.

Look at how your fund is doing in the performance tables and ask whether it is still open to new business and how much is invested in shares (at least 40% should be the target).

Check how much the policy may pay out based on the reprojection letter you will have received. Then ask for the current surrender value* and add this to the cash savings you would make on not paying any more premiums.

Weigh the reprojection amount against what you can earn on the surrender money elsewhere. Use the lower projected rates except in the case of very strong firms such as Norwich Union, Prudential, Legal & General and Standard Life, says IFA Patrick Connolly of Chartwell.

WHAT are the alternatives if I don't want to keep paying?
IF IT is a with-profits* endowment and has been running for at least ten years you could try to sell it. Contact the Association of Policy Market Makers for details. Or you may be able to make the policy 'paid-up'. Your money stays invested and will continue to earn bonuses. When it matures you will get a payout, though it will be much smaller than if you kept saving.