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Money Talk

Q I am 44 years old, but have saved little and in fact owe approximately Pounds 4,000 (credit cards, personal loans). I also have an outstanding mortgage of Pounds 15,000 with about 20 years to pay. I earn Pounds 29, 000 per annum before tax, and I am married with one son aged 13. I have been teaching full time since 1971 and have the following insurance policies.

A policy (part endowment) with Legal and General that is due to mature in 2000 with an assurance of Pounds 4,100 bonus andor a guaranteed death benefit of Pounds 7,277. I pay just under Pounds 30 per month on this policy which was taken out in 1983. I also have a Covermaster Plan with Abbey Life. This was taken out in 1983 and initially gave life cover for Pounds 73,962. For this I paid Pounds 19.42 per month. In October 1993, however, I was informed that the cover went down to Pounds 25,612. I was persuadedadvised to take out an additional policy to ensure I was "adequately" covered. This policy costs an additional Pounds 29.29 assuring Pounds 72,639 (again with Abbey Life).

I want to know if I need this amount of life insurance and if I do not which policy should I stop paying? Ifwhen I stop paying should I put the money (a) straight into a building society or other saving schemes you have referred to in previous columns, or (b) pay off my debts as quickly as possible?

A Life assurance investment policies are expensive. Policies are designed to pay a high rate of commission to the insurance salesman and such payments are reflected in the policy charging structure together with the insurance company's own administrative charges and "profit margin". So, a substantial proportion of the premiums paid in the early years are not invested for the policyholder's benefit.

Life assurance polices are not tax efficient for most people. Like most individuals and companies, insurance companies pay tax on the income and capital gains generated on their investments. Therefore, many life assurance policy-holders are indirectly paying tax which they would not pay if they held investments in their own name rather than via an assurance policy. From a tax-planning standpoint, life assurance policies are only a tax efficient investment for policy-holders who are both higher rate income tax payers and are making full use of their annual capital gains tax allowance.

Life assurance policies are inflexible. The high initial charges mean that if a policy-holder wants to stop paying premiums or surrender the policy before the contractual maturity date the "paid-up" policy value or the surrender value will often be less than the premiums paid, particularly in the early years.

Certain life assurance policies do, however, offer valuable protection either by providing a lump sum on the death of the policy-holder or a replacement income should the policy-holder become disabled and unable to continue work. In short, I think you should use life assurance policies for protection but not for investment.

So what should you do about the Legal General and Abbey Life policies? You certainly need some life assurance so that your family can pay off the mortgage should you die before the redemption date in 20 years' time. Also, if the mortgage is on an "endowment" rather than a "repayment" basis, you will need a lump sum of Pounds 15,000 to pay it off in 20 years' time.

I would suggest that you maintain premiums to the LG policy until it matures in 2000 when the proceeds will pay off at least part of the mortgage.

The Abbey Life policy is more complex. It appears to be a policy under which the death benefits can be varied, probably either by you or by Abbey Life. Such policies tend to work on the basis that premiums secure either a minimum or maximum level of cover.

If the maximum level is selected, which I suspect the initial cover of Pounds 73,962 represents, this will be maintained for as long as the premiums are paid and that the investment return achieved on the policy is, on average, equal to or greater than a level which will be set out in the policy document. If the investment return is greater than that required the value of the policy will actually increase.

On the policy's 10th anniversary, presumably October 1993, Abbey Life reviewed the policy and concluded that the premiums being paid andor the investment return achieved over the previous 10 years was not sufficient to maintain cover at the maximum level, so they have adjusted it downwards, to Pounds 25, 612, which will either be the minimum level of cover or the amount of cover which they calculate can be maintained by the premiums being paid and the investment return that has been achieved.

The policy probably has no fixed maturity date and will remain in force until either you die or stop paying the premiums. You can expect Abbey Life to review the cover, upwards or downwards, every 10 years.

In my opinion, you need at least another Pounds 7,723 of life cover in addition to the Legal General policy to give your family enough capital to repay your mortgage should you die. Therefore, you could maintain the premiums to Abbey Life, but ask them to reduce the life cover to this level (or to the minimum level of cover available under each of the two policies, if that is greater). This will mean that a higher proportion of each premium will be invested, rather than absorbed to pay for life cover, and the cash value of the policies will be greater on your death or when you surrender the policies, assuming that the policies achieve a reasonable rate of return. They should then also provide you with a higher cash surrender value in 20 years' time which you could use to redeem all or part of the balance of your mortgage.

Alternatively, you could surrender the policies now. The 1983 policy has been running long enough to offer a reasonable surrender value, in all probability, and unless you are a higher rate tax payer there should not be a tax charge to pay. The sum available could then be used to repay your debts andor all or part of your mortgage. However, the 1993 policy probably has no surrender value at all at this stage and you should maintain the premiums. I suggest that you write to Abbey Life for information and advice about both of these options.

Regarding further investment, I suggest that your priority should be to repay your debts and then to build up savings via one of the investment mediums discussed in this column in previous weeks.

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