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Stay under cover

I am in the process of selling my house and plan to move into rented accommodation for up to three years before hopefully purchasing the property of my dreams. I am reluctant to continue paying premiums to my endowment for life and critical-illness insurance while without a mortgage, other debts or family and feel that any encashment value could be better invested elsewhere. Recent coverage and criticism of endowments has made me nervous of them and any future mortgage would be on a repayment basis

Given that you are single – although cohabiting – and without debt, you are right to question your requirement for life insurance once your mortgage account has been settled.

Even if you were able to return to work, a critical illness could result in you being deemed uninsurable which would be a worry to any prospective lender and definitely of great concern to your partner. It would therefore make sense to ensure that, while in rented accommodation, you would be able to protect your future living arrangements in the event of illness.

Just as you had a policy to redeem your mortgage in the event of illness so that you could remain in your home regardless of your health, so it would make sense for a sum of money to be paid out to buy a property without a mortgage in the event of illness so that your future living arrangements are protected.

Assuming you do decide to proceed with the surrender of the endowment policy, I would suggest you apply for a replacement term policy to provide continuing critical-illness insurance. As the premium would not be greatly affected by including life insurance so that a payout was made on the first event, I would suggest this should also be included. Obviously, the existing endowment should not be surrendered until alternative cover is in place.

As far as the surrender of the endowment is concerned, I do not propose to enter into a debate as to the validity of this based solely on recent criticisms, which are not of all endowments or all companies, as this has been well documented elsewhere. However, I would offer the following comments for you to consider.

The policy was effected in 1992 to pay a lump sum in 2017. By encashing the policy now, you will receive a lump sum which, if invested properly, could result in a substantial amount being available in 2017 to reduce your mortgage.

Surrender of the policy in the first 10 years creates a potential liability to tax on the proceeds if, when added to your income in the year of encashment, you move into the higher-rate tax band.

If reduction in expenditure is the aim, the policy could be made paid up and no further premiums paid while enjoying exposure to investment growth and retaining membership rights in the case of a mutual insurer. If realisation of a capital sum is required, a partial encashment could be considered or a loan granted against the policy value by the insurer.

If full encashment is definitely required, the secondhand market would be worth considering as significant improvements on the surrender value can be obtained.

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