Should People Consider Surrendering Endowment Policies?

Endowment policies are commonly sold as a product add-on to life insurance, and function as an investment plan for the future.

Guaranteed or Not?

If a policy has not reached maturity when upon death of the holder, the insurance company pays out the life insurance settlement, guaranteeing the contract. This is called a ‘with profits fund,’ but another option is a ‘unit-linked’ contract, where monthly payments are invested and dependent on market activity.

When an endowment policy is linked to the market, its value can decline with it as well. Such poor performance means many holders are surrendering endowment policies before they have matured. Bad investing contributes to early endowment surrender, but it is also used to settle a divorce, free up capital, or to re-negotiate a mortgage.

Options for Non-Performing Endowments

Surrendering the policy leads to a loss of future profits, but if the investment is losing money it prevents any further negative results. Once surrendered, the person is free to switch to a more profitable place for their money, but the nature of this investing vehicle should be well understood before letting it go.

The largest gains in a profit endowment are typically seen near the end of the term, and walking away early will cost the investor additional fees. Policies are set up by insurance companies with the intention of providing low premiums to the insured, and delivering large bonuses towards the end of the agreement.

Cashing out early is a sure way to lose money, especially considering that ‘early surrender penalties’ are figured by examining the company’s loss after absorbing the set up costs.

Because an endowment is a long term insurance plan people choose to support them later in life, it is not appropriate for someone interested in fast market profits. With the safeguards set up by the issuing agency, it may be one of the safest options, despite unpredictable performance over the short term.

There are several alternatives to endowment surrender, including holding onto the contract. Historically these investments deliver good returns when they get to maturity. Another choice is to execute a version of a second mortgage on the policy. Instead of a second on your home, the insurer might let the holder do a loan-back against the endowment contract. This loan will be settled through the final returns at the end of the contract, and solves an immediate need for cash.