Get the nose for a second-hand rose

If you have an endowment mortgage and are worried about whether the endowment will pay off the loan, you may be considering selling the policy.

Many people in your position have taken this step - so many, in fact, that there has been a surplus of policies on the market over the last couple of years.

Anyone contemplating either selling or buying a policy on the second-hand market should think very carefully about the move.

'Most people would not sell their policies if they were given sensible advice,' says one player in the market. 'They are following like sheep.'

The idea of selling a policy can seem to have official approval following the requirement last autumn from the regulator, the Financial Services Authority, that life offices tell any customers who ask to surrender their endowment policies that they can sell them as well.

Many people take this route if they find that they can get more money by selling than surrendering. The premium typically made by doing this is 10 to 15 per cent, according to the Association of Policy Market Makers, although leading player Policy Portfolio says the premium has dropped to 5 to 10 per cent in most cases.

Reductions in the prices market makers will pay have occurred for various reasons in the last couple of years. Stock market falls from peaks reached in 2000 have fed through into cuts on the amounts that life offices pay out in bonuses.

The Britannic went so far as to cut its bonus rate to zero, and demand for its policies on the second-hand market dried up.

The Equitable Life saga shook confidence in the second-hand sector as potential investors worried about the financial soundness of life offices and the reliability of projected bonus rates.

Equitable, and many other offices, switched heavily from equity to gilt investments and so reduced their ability to benefit from any upturn in the stock markets.

Prices also dropped as mortgage borrowers offloaded their endowment policies in large numbers when they were told that these were unlikely to pay off the loan.

As a result, the traded endowment policy sector has changed significantly. 'Prices to investors have come down by up to 10 per cent,' says Brian Goldstein, managing director of Policy Portfolio and chairman of the Association of Policy Market Makers.

'There are many more policies for sale than there used to be.'

But he adds that many former investors have become alarmed by the build-up of bad news in the market, and that most of those who remain are 'high net worth individuals' buying a portfolio of policies on the advice of financial advisers or accountants rather than people just buying one. Many investors have had their fingers burnt, says Richard Ashken of City Endowments, a company that has had its own problems.

He says: 'If you are financially sophisticated, these are good investments for the future. But it's all about timing. If you'd bought them three years ago, you'd be nursing losses now.'

It is not just investors who have suffered, says Ashken. 'Some market makers have contracted and reduced staff, including us.'

Some market makers got caught with large amounts of unsold stock on their hands when investment returns fell and bonuses were cut.

It is too easy to say that buyers and sellers should take professional advice. Not all advisers understand the complications of this market - the way that market makers cut and lengthen policy terms, for instance, the reliability of projections on bonus rates and the best ways to value policies.

Edinburgh-based actuary Ronnie Sloan believes he is one of very few people who analyses individual policies (for an £80 fee) to get a reliable, objective measure of their worth.

'They can be a good buy but you need to check it out,' he says. Each policy needs to be analysed individually, he says, as the inception and maturity dates, amounts paid and age of the policyholder all have a significant bearing on the value.

Of the Norwich Union policies he has recently analysed, he has given valuations of between 65 and 102 per cent of surrender value. Norwich Union, Clerical Medical, Legal & General and the Prudential remain among the most popular life offices.

'Some policies are not easy to sell: those with small maturity values or which have run for less than 10 years. Their standing will be under scrutiny again now the annual bonus declaration season is under way.

There are other trends in this sector that are worth knowing about.

Some players are trying to encourage potential sellers to hang on to their policies, get a bank loan against them or go in for a new type of arrangement where they get some cash upfront but then retain a small interest in the rest of the policy.

Someone with an endowment policy should not rush to sell if they are told that there will be a shortfall on their mortgage.

The endowment, in this instance, is clearly worse value than the homeowner originally thought - but holding on to it could still be better than the alternative of selling.

From the buyer's side, there is growing interest in policies where the purchase price is less than the sum of the bonuses declared already, the life sum assured and the value of the payments that have yet to be paid to maturity.

Anyone wanting to enter this market should read up on it first, talk to different players and become as knowledgeable as possible. There are probably many people out there who have sold off policies too cheaply or sold them when they would have been better off keeping them.

And there are probably many buyers who bought policies only to find bonus rates cut.

· Ronnie Sloan can be contacted on ronnie@sloan42.fsnet.co.uk. The Association of Policy Market Makers has a helpline for investors (020 7749 3400) and one for sellers (0845 011 9394) which offers you quotes on your policy from eight market-makers.