More on life Assurance

Required Reading


More on life Assurance

Past results have shown that the best unit-linked policies have tended to produce better results than the best with-profits endowment policies. The worst unit-linked results, however, are poorer than the worst with-profits endowment ones.

The main problem with using unit-linked policies in connection with a mortgage is their volatility. If the value of the policy can go down as well as up, you will never be in a position to know, until right at the end of the mortgage term, whether you will be able to pay off the loan.

Unit-linked companies have tackled this problem in a number of ways. Some have made the premiums adjustable, and so, if it looks as if the policy is not going to grow sufficiently to pay off the loan, the premiums are increased. Others have provisions that your policy is `switched' to the safe and steady deposit fund about five years before the end of the mortgage term.

Few people, as yet, are making use of these new unit-linked endowment policies, though they can be expected to grow in popularity as the public and the building societies themselves get used to them. If you are interested in these new developments, try to find a good broker who knows about them. You should not decide without comparing them first to the more conventional low-cost endowment method of paying off a mortgage.

One scheme deserves a mention by name, because it is likely to be the forerunner of a number of similar ones. The Northern Rock Building Society has teamed up with a friendly society to produce a low-cost endowment mortgage.

The twist here is that friendly societies do not pay tax on their investments, so that the value of the policy can be expected to grow at a faster rate than those of ordinary life companies, who pay tax on the income from their investments at up to 37.5%.

Friendly society schemes are limited to married couples or those with dependent children, and the total amount that can be invested through them is also limited. They can therefore be used to pay back only relatively small mortgages.

One reason why building societies have been unwilling, to date, to accept a friendly society investment as adequate security for their loan is that the policy cannot be assigned (that is part of the law governing friendly societies). Building societies have, however, already jumped that particular hurdle with pension mortgages and it is probable that we shall see further developments on these lines.

Read:80 mortgages

Joint life or single life?

Endowment policies can be written either on your own life or on the `joint lives' of yourself and your wife or husband. These days, however, you are unlikely to be given a choice. Life companies have had so many problems with joint-life policies issued to couples who have subsequently divorced that they are unwilling to issue them now.

If you really want one, you could fight for it why should you? There's no real advantage in having a joint-life policy, and you should really be taking out extra life assurance cover in excess of what is given by the endowment policy anyway.

There is one circumstance where a joint-life policy might be preferable: if one of you suffers poor health. Most endowment mortgage policies these days . . .... see: Joint life or single life?

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