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What is an Endowment Sale?

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  • Written By: Shannon Kietzman
  • Edited By: Niki Foster
  • Last Modified Date: 10 September 2016
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An endowment sale is a transaction that takes place when an endowment policyholder decides to sell the policy. An endowment policy buyer is the entity who purchases the endowment, usually a company that specializes in making this type of purchase. An endowment policy is a regular savings or investment plan combined with life insurance in a single policy. If the owner dies before the policy reaches maturity, the endowment policy life insurance company pays out a specified amount of money.

There are a number of ways an endowment sale can take place. First, an endowment sale can be handled personally, with the policy owner contacting an endowment purchasing company. This type of endowment sale is fairly easy to complete, and most financial advisors will walk the policyholder through the process.

Another way to complete an endowment sale is at an endowment auction, or through what is referred to as a market maker. A market maker is a window through which endowment policy traders can make offers to purchase policies. It is akin to the stock market, but on a much smaller and calmer level. In this type of endowment sale, the policy trader can farm out the policy and get a better price by offering it in the open market.

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There are two primary types of endowment policies: unit linked and with profits. A unit linked endowment policy involves monthly premiums that are invested into units. The value of this policy can fluctuate depending on the performance of the investment.

If there is strong economic growth, a unit linked endowment policy is the best option. If the market is down, however, so is the value of the endowment. The current value of the policy has an impact on the outcome of the endowment sale.

The more traditional endowment policy is the with profits variety. This type has a guaranteed value and will never go below a specific amount. This is the safer route for those not willing to take a risk with the unit linked policy.

Cashing in an endowment policy is a major decision. There are many alternatives to an endowment sale that are worth exploring before taking such a big step. Most individuals seek an endowment sale because of drastic changes in their circumstances, such as divorce or a change in mortgage arrangements. More recently, a low maturity projection by the endowment policy issuer has become another reason to carry out an endowment sale.

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Sunny27
Post 6

I personally don’t like combining insurance with my investments. I think that life insurance is really meant for people that are dependent on a spouses’ salary.

I have term life insurance on my husband which does not offer a cash value, but it is also a lot cheaper than universal life insurance that offers the cash value.

If I had an endowment I would be looking at selling the endowment because I think that investments made with insurance companies usually offer very low rates of return.

There are also a lot of surrender fees which in my opinion make insurance investments not the best. I also don’t try to invest in products that I don’t understand because that is how you lose your shirt.

bigjim
Post 5

@veruca10 - Of course, losing part of your life insurance may be of less importance to people in certain situations.

For example, a widow who has two children, both of whom are well-established business owners or doctors and who do not need money, would have little need for life insurance and could sell the policy and use the money to travel or otherwise enjoy the rest of her years.

Or, someone who knew his wife was cheating on him and did not want to have to split the proceeds with her in a divorce he was planning a year or so down the road, or did not want her to inherit the money if he were to die, could cash out and stash the money to pay for his attorney bills.

People have very different situations in the world.

emtbasic
Post 4

@nony - I certainly agree with you about the endowment mortgage. It doesn't make sense to me for anyone to just pay on the interest of their mortgage and then let investment profits pay the principal.

Is it possible there is more to that situation? Because at face value, you are right. Makes no sense.

Why not make payments directly to the principal both monthly and with your profits? The amount of interest paid long-term would be a lot less because the principal would keep going down.

Veruca10
Post 3

I remember these being really popular about 15 years ago, and then suddenly you didn't hear much about them anymore. If memory serves they used to have some tax advantages that may no longer apply to a new purchase.

At any rate, the decision to sell your endowment policy is a serious choice, because it also takes away part of your life insurance. This diminishes your estate for those you leave behind, which may or may not be important to you depending on your family situation.

allenJo
Post 2

@nony - I agree. Actually your “what if” scenario has already happened.

The stock market bubble of the late 1990s collapsed near the year 2000, and the market lost 20% of its value.

If you had been holding an endowment policy of any kind, whether it’s mortgage or something else, you would have taken a hit, along with everyone else who saw their 401ks and other stock investments pummeled.

A mortgage endowment would be a real problem however, as you would have been left with no money to pay the capital (assuming you didn’t have extra money each month to pay it down). You certainly would have faced foreclosure.

The stock market is a good long term investment; but I would never tie it up with anything having to do with life insurance or mortgages. These are two instruments where payments need to be fixed, not subject to market gyrations, in my opinion.

nony
Post 1

I think that endowment selling can be useful in some situations where you need a big chunk of money fast. It’s almost like cashing in your life insurance, since an endowment policy is basically savings and investments plus life insurance, as I understand it.

However, there is one variation on this theme that I do not recommend to anyone. It’s called an endowment mortgage. This is where you split the mortgage between capital and interest; you make payments directly on the interest and you make payments on the capital of the mortgage with the profits you get from your endowments.

In my opinion, this is almost like a Ponzi scheme where you borrow from one fund to pay another fund. What happens if your investments go south?

Suddenly you can’t pay the mortgage capital, and you face foreclosure. I don’t recommend this approach at all.

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