Endowments and Divorce

Divorce is a major reason people look to sell endowment policies, according to latest research. Family law solicitors can advise their clients to look at all sensible options when evaluating existing endowment policies but it is up to the client to seek independent financial advice in order to reach their own decision. See our article on Financial Advisers

Many people caught up in the distress of divorce tend to surrender their policies rather than consider selling them. Please read the following article.

Article by Kevin Harris-James, partner with Shakespeares LLP in Birmingham

Endowment Policies

In the unfortunate event of marital breakdown it is very often the case that upon sale of the former matrimonial home any endowment policies previously secured to the property are simply surrendered (i.e. cashed in). It is, however, in my opinion, incumbent on the solicitor advising in the divorce settlement to investigate all sensible options to properly represent the client's interests.

Before considering all alternatives, it is important to understand how an endowment policy works. It is a form of life insurance with payment of a fixed sum to an insured person on a specified date, or to his estate on his earlier death. To this sum reversionary or normally annual bonuses are added with final or terminal bonuses also being paid by most insurance companies.

The type of endowment usually associated with mortgages are a variation of the with profits endowment known as a "low cost endowment". It combines a normal with profits policy with a decreasing term assurance. The death benefit usually equals the outstanding balance of the mortgage loan but the "fixed sum" or sum assured is usually much lower than this sum in the early years of such policy.

Endowment policies have been an attractive way of securing low cost "interest - only" mortgages as they represent relative security to a Mortgagor and can achieve a comparatively high return to the investor. Endowment policies now feature regularly as part of a matrimonial estate.

There are administrative costs levied by a life company and these charges tend to be deducted in the early years of the policy. For that reason if an endowment policy is surrendered in it's early years it generally fails to attract its true market value. It may acquire a "surrender value" which is sometimes lower than the amount paid into such a policy.

Generally speaking if an endowment policy is less than 5 years old, surrendering the policy is usually the most sensible option, if the premiums cannot be maintained by either party.

However with an endowment policy that has been running for a period in excess of 5 years there is sometimes a more attractive option to consider, namely to sell or auction the policy. Having said this for a twenty five year policy most market traders will require the endowment to have been running for at least 10 years.

Over the last few years there has been a growing market in second hand endowment policies for private or institutional investors who are prepared to pay in excess of the surrender value. Such policy represents a safe investment because the value of the policy tends to improve significantly in its later years, and it is also secured on the life of the policy holder and as such there is always the possibility of an early return in the event of their prior to the conclusion of the term of the policy.

There are a growing number of highly regarded companies dealing with second hand endowment policies who are often able to secure over 25 per cent more than the surrender value of a policy by way of auction. There are of course fees to be paid but nevertheless the returns still remain the same.

A word of caution - it is not the place of the solicitor to advise whether or not it is in a particular client's interest to auction an endowment policy. It is for an independent advisor to assist in this respect. It is however the solicitor's role to fully explore all options to ensure the client is able to make an informed decision.

During times of marital upheaval there are many difficult decisions to make and in my experience clients tend to opt for the route of least resistance by simply allowing an endowment policy to lapse or surrendering a policy. Selling or auctioning an endowment policy is not a difficult or expensive process and therefore should be considered in appropriate circumstances.

Editor's note: See our article on Financial Advisers and our referral link.

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