graphHowever bleak the January weather, the financial world’s hot gospellers will be out on the roads, producing life insurance to save families from the wrath to come. Only life insurance men portray a sales drive as a moral crusade, and the pressure can be wonderfully unsubtle.

Those searing tales about the man who died, leaving his wife destitute because he had never got round to taking out a policy, are only the nursery slopes of moral blackmail. The unspoken pressures can have far more impact. One American broker used to work from an office overlooking a cemetery, and potential clients would be shown up to his office, only to be told that he would be a few minutes late. They would then wander over to the window to where a burial always happened to be in progress – at which point the broker would appear. He claimed that he never missed a sale.

Life companies always resents a good deed protecting people from the consequences of their own fecklessness – and providing them with funds in old age. That may be true enough, at least with the first policies they buy. But all too often people cancel one life policy to take on a second, and do very badly in the process. Addition is fine, but substitution is a disaster except, of course, to the sellers.

Banks, building societies, estate agents, insurance brokers and salesmen are all keen to sell life insurance. The time when there is greatest pressure to change policies is when you move house. Buyers may find endowment mortgages good enough when they move on to the housing ladder for the first time, but the big scandal comes second, third and fourth time round, as they find themselves taking out new life insurance contracts to go with the new mortgage.

The problem is real enough. People in Britain lose [British pounds] 680 million a year from cashing in old policies and taking out new ones, according to the Institute of Insurance Brokers. Why do they do so badly? Partly because life insurers load all their charges for commission, administration and life insurance at the start of the policy. These can absorb the first year’s or even the second year’s premiums – and if you cash in a policy within that time you will very rarely get anything back. The other still more basic point is that the more recent the policy, the less money there will be in it because it has had less time to grow.

But there is even a snag to cashing in life policies that have been running for some time. If the contract was up and running before March 1984, tax relief helps with the cost of the premiums. But that certainly does not apply to any policy starting now, which will be more expensive anyway – if only because the people taking it out will be that much older.

All too often people assume that if they run into cashflow problems, surrendering or cashing in a life policy is their only option. If they have to cut back their spending, the more profitable way to do it is to make the contract paid up. This ensures that they do not have to pay any more towards it, but the money already in the policy continues to grow and provides at least some limited benefits. Alternatively, most insurers allow you to borrow money against the contract’s cash-in value, if you have a with-profits policy. Interest rates vary from company to company, but can often be lower than those you have to pay elsewhere. Usually the interest the insurers deduct ticks up, and both the original loan and the interest due on it are deducted from the proceeds when the policy matures.

If you use the money for business purposes, there is tax relief on the interest you pay – subject to one caveat. The crucial point is that you actually hand over interest regularly rather than letting it roll up. Whatever happens on that score, banks will often provide overdrafts on slightly better than average terms, if you can secure them by providing a life policy as security. But, clearly, if the policy is pre-committed to paying off the mortgage, that is not an option.

Auctioning the policies provides the highest cash returns, though they will vary from policy to policy and auction to auction. Foster and Cranfield, based in the City, are the great auction specialists, and have been in the business of selling reversions since 1843.

Most people put a reserve on the policy. If the final bidders will not offer more than the cash-in value that the insurers themselves provide, it is withdrawn from the sale. Foster and Cranfield will take as a fee one-third of the difference between the price for which you sell and the insurer’s surrender value. Even after paying those expenses, people can broadly expect to collect 30% more than they would get from surrendering the policy. The one snag is that the auctions only cover with-profits policies and not those which are unit linked.

Doubtless the life insurance men will continue to sell policies, stressing that Britain is massively under-insured. But new policies for old make matters worse. Raising money against the security of a life policy is easier than it looks, and far more sensible than cashing in the assets. If that has to happen, auction – not death before surrender should be everyone’s motto.