Alternatives to surrendering life insurance

Many people who take out life insurance policies find that within a few years their circumstances have changed to such an extent that the policy is no longer relevant to their needs. While financial advisers encourage people to take out life insurance policies, very few provide advice when their clients want to stop their premium payments. Financial advisers receive commission when policies are commenced, and they may be required to return some of this commission to the insurance company if the policy is terminated at an early stage.

The golden rule is to surrender life insurance policies only as a last resort. Life insurance policies can be quite valuable and a number are highly saleable, but only if the insurance policy is kept in force until a buyer can be found.

The people who surrender or abandon their endowment policies early fund the investment performance of those policyholders who hold out for the full term. Generally speaking, seven out of every eight policyholders surrender their policies before they mature.

Life insurance companies impose the vast bulk of their charges early on, so most, if not all, of what goes into the policy in the first two years will not actually be invested. Anyone surrendering a policy within three years will receive virtually nothing back. However, there are alternatives to surrendering insurance policies.

Making a policy paid up

This can often provide the best choice for people who need to cut down spending but are able to leave existing savings where they are. Making a policy paid up simply means ceasing to pay premiums with the agreement of the insurer.

This option is useful to people who would like some money to be paid out by the insurance company to their estate in the event of their death.

Borrowing against the policy

This option is available if the policy has been in force for some years, and can produce ready cash at better rates than bank loans. Normally you can borrow up to 85% of the policy surrender value, and you do not have to return any of the money borrowed until the policy is due to mature. Further details of this option are available from your insurance company.

Auctioning or selling the policy

This option will produce better returns than surrendering the policy. Typical sale or auction values are at least 25% above the surrender value, although they can be much greater. The policies are bought by people who will continue the payments until the policy matures or the life assured dies, at which time the insurance company will pay out the benefits to the person who has bought it.

Most buyers will never meet the `life assured', nor will they know when that life assured dies.

Accordingly they generally value the policy on the assumption that they will only cash the policy in when it matures. However, if a life assured makes it known that his life is impaired i.e. that his life expectancy is shorter than usual, buyers may be prepared to pay more for the policy, as they would expect that the insurance company will be paying the death benefit sooner than would normally be the case.

Increasing numbers of people who have declared that their lives are impaired because of an HIV-related infection are finding that buyers are not prepared to pay as much for the policy as they might have paid a few years ago. As well as the current economic climate, this is also due to the general increases in life expectancy of people who are successfully receiving HAART.

Some firms buy policies with their own funds, which means that they can pay promptly rather than waiting for a buyer. Examples of such firms include Life Benefit Resources and International Viatical Settlements (UK). Both firms offer slightly different terms depending on the size of the policy, its remaining term and the policy holder's life expectancy. Eligible policies include Term Assurance, Whole of Life and Endowment policies, both unit linked and with–profits. Both firms will offer a free quote without obligation.

Other firms act as agents, and will need to find a buyer before the policy holder receives any cash. This can sometimes take time. Agents also take a commission from the transaction, usually between 10–12.5% of the price, which is deducted from the sellers proceeds.

Some firms act as auctioneers. The disadvantage of this process for someone with a terminal illness is the degree of disclosure of confidential information about your medical condition which may be required during the auction. Auctions also take place only occasionally, and policies may not attract a buyer, which entails a delay before any cash is received.

Reputable firms recommend that policy holders take independent advice, such as from a solicitor, before selling their policy. All firms in this field should be registered under the Financial Services Act. It is not advisable to deal with firms which are not registered. Firms buying policies from people who are diagnosed as having a terminal illness will seek medical confirmation of the prognosis which should be treated in absolute confidence.