Boost for 'used' policy traders

The mortgage endowment crisis is making waves in the world of second hand policy deals. Although dealers are becoming more selective in what they buy, they expect an increase in numbers of policies being offered for sale.

With many worried policyholders considering disposing of their plans outright rather than paying more each month, dealers hope for a boost in business.

Endowments are likely to perform less well than originally forecast because interest rates and other investment returns have fallen along with inflation - reflected in lower projection rates from insurance companies and translated into demands for higher premiums if policies are to hit home-purchase targets.

Standard Life, Allied Dunbar, the Prudential and other endowment companies are sending letters to hundreds of thousands of policyholders warning that their life insurances might not pay off their home loan despite promises from sales people that they would both settle the mortgage and provide a tax-free lump sum.

Independent financial adviser Colin Jackson of Lon don based Baronworth Investment Services says second hand policy dealers - more politely known as traded endowment policy (TEP) market makers - are becoming more cautious.

Jackson is one of a handful of specialists, known as trawlers, who offer policies for sale on behalf of clients to a large number of market makers to find the best deals.

He says: "TEP traders are tending to be more careful in their purchasing of policies than they used to be as they react to the probability of lower bonus rates. And that's especially marked when it comes to buying plans issued by life offices with poorer investment records."

These include policies issued by offices such as Colonial, Eagle Star, Pearl, Scottish Provident and United Assurance, which have scored mediocre past results, and those from offices now closed to new business such as Gresham Life, London Life, NPI and Swiss Life. Policy buyers believe managers running closed funds do not try so hard as those running plans which are trying to attract new customers. Many closed groups routinely refuse to reveal figures to Money Management with-profits endowments surveys.

Independent financial adviser Geoff Pollock of Rickman Tooze, which specialises in second hand policies, says: "There have recently been far more buyers than sellers, which meant that traders had to scale down orders from potentially profitable customers. We don't advise those caught up in the endowment crisis to sell but if they do, we would always suggest looking at the second hand or traded endowment market. However, some policies are more attractive than others. The mutuals are the favourites."

Traded policy market maker David Carrington at Policy Plus International is seeing "a few more inquiries" since the endowment mortgage shortfall scandal was revealed.

He says: "It's not a flood but it is still early days. People are taking time to think things over before selling."

Carrington reckons that while home-loan customers have a fixed target to hit on a fixed date, policy purchasers can profit from a low-risk investment which is likely to outpace rival plans. "When an endowment is tied to a loan, the projections look extravagant and the product is flawed. But take the mortgage away, and the with-profits endowment stands on its own two feet. It is now simply an investment. After all, someone else has taken all the pain of the early years when a large part of the premiums disappear in costs."

He estimates demand from investors has doubled in a year - helped by the 13 endowment funds now on offer - and shows no sign of abating whatever the criticisms. The policies have a great appeal to those who find the stock market too scary and returns on cash too mean.

Rival TEP trader Helen Langton at Neville James says the problem is largely concentrated on short-term endowments with profits plans running for 20 or 25 years are "still performing well, helped by the original buyer paying all the front end charges".

But second-hand policy dealers do not have to adhere to official projection figures, now based on a 6% growth rate. Instead, they can quote a "pricing discount rate" which, although not a forecast of future growth, could look like one to first-time buyers.

Policy Plus, for instance, quotes a Norwich Union policy with a surrender value of £9,079 which matures in May 2005 for £14,551. Paying all the remaining premiums involves spending £7,772 - and the "formula maturity value", based on current bonus values remaining unchanged until 2005, is £35,246. This is equal to a 10.5% discount rate.

And it has a General Accident policy maturing in 2018 for £8,595, compared to the £4,660 offered as a surrender value by the life company. Paying the remaining £61.90 a month premiums totalling £13,432 could turn into a £125,066 maturity value, with the gain free of tax for most investors.

But as it is calculated using today's rates, which are not guaranteed, the real return could be far lower.