HAVE you ever been advised, or taken the initiative yourself, to cash in an insurance policy? As the average life span of a 20-year insurance policy is less than seven years, there is a fairly good chance you have. The Hong Kong community has always been ahead of its British counterparts when it comes to financial sophistication - or so we are told - apart from when the decision is made to cash up a savings plan. Most of us accept the value placed on our policy by the life company and passively receive our payment, normally a modest increase above the total premiums paid. For those who are unaware: there is a better way! An industry that is very much on the rise in Britain is the ''traded endowment'' market. Quite simply, companies will buy your with-profits endowment or whole life policy from you for a value in the region of 15 to 20 per cent more than the insurance company is prepared to pay. Why? Because they can sell your policy on to someone else for a higher value again. Naturally, the difference in the two prices is their ''turn'' as a market maker. Why somebody else would want to buy your endowment needs some explanation. Life insurance companies collect their charges over the initial years of the policy and, as a rule of thumb, the value of a policy should be greater than premiums paid after one third of the policy term, which means a 20-year policy should show a profit after six or seven years. The increase in value after this ''initial period'' is vastly accelerated and, as such, an individual buying your policy mid-term will be doing so after you have effectively paid the charges. In addition, up to 60 per cent of a with-profits policy can be made up of the terminal bonus, which is a single addition to the policy on the day it matures. As a result, a large proportion of this projected payment is lost on early surrender. Naturally, the purchaser of the policy will be obliged to continue your payments up to the maturity date of the policy and will be entitled to the entire terminal bonus payment. Not only does the purchaser get the policy ''charge free'', he also has a much shorter period to contribute. The risk to the purchaser is that the projected value will be lower than the projection at the time of purchase. For example, a policy maturing in November, 1997, is currently being offered a surrender value of GBP4,465 (about HK$50,900). Its current projected value is GBP17,183. This policy can be purchased for GBP8,938 with monthly contributions due of GBP70.44 per month payable to November, 1997 (an additional cost of GBP3,170). This represents a potential return of GBP5,075. Allowing for future contributions, this represents an 11.1 per cent discount on the projected value of the policy. Assuming a 25 per cent reduction in future bonuses (both annual and terminal), the discount will reduce to 7.8 per cent. Given the ''smooth'' return available from with-profits policies, the purchase of an existing endowment policy can be particularly attractive when used for school fees' planning or house purchase. Finally, the tax considerations for anyone returning to Britain are such that individuals should consult their tax adviser on whether or not to purchase a qualifying or non-qualifying policy. An individual resident in Hong Kong at maturity of a policy will have no British tax liability. Given the attraction of buying someone else's endowment policy, it makes you wonder why you are selling yours in the first place.