Joint Life Policies

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Joint Life Policies

Whether the full or low-cost endowment method is used, it is worth thinking about making the policy a joint life one. This means that the sum assured is payable on the death of either husband or wife. The additional premium required is normally less than the cost of a separate term assurance for the wife for the same sum assured.

How to Choose a Scheme

Almost all life insurance companies now have low-cost schemes on the market. The main competitive thrust to date has involved the reduction in premium rates to make the schemes more competitive as compared with the repayment mortgage. Some plans even involve a reduced premium on the policy for the first few years and a higher one later, with a deferment (or reduction) in the investment benefits. If you can afford to consider only this type of plan, you are probably better off without an endowment mortgage.

Other innovations of more use to the policyholder concern the alteration in the terms of the policy to take account of moving house. It is obviously desirable to have the option to increase the sum assured without medical evidence so that an additional policy can be added when a larger house (and loan) are acquired. One alternative is the option to extend the term of the original policy so that its increase in value can repay a larger loan. (Such an extension, incidentally, is contrary to an old tenet of actuaries that contracts may be shortened but never lengthened because of the extra risk to the company involved in lengthening a contract. You can always convert a whole-life policy to an endowment, thus shortening the term, but you cannot normally do the reverse.)

While flexibility is useful, the company's bonus record is probably of greater importance. Any contract you choose is guaranteed to repay the loan on death and conservative bonus assumptions mean it is as good as guaranteed to do so at maturity. But the surplus that emerges over and above this will depend on the company's investment success over the period. It does not make a great deal of sense to select a policy simply because its monthly premium is 50p below that of its competitors. One of the reasons for buying a policy is its investment merit, and so the selection of a company with a good investment record should take priority over small cost differentials.

It is also worth noting that any existing endowment policy you already have may be tailored to repayment of a loan. Many companies will allow you to "trade-in" your old policy against a new one of the right type for the repayment of the loan you want, and the surrender value of the old one will be incorporated in the new. Alternatively, if the existing policy is a substantial one, the loan may be matched to it.

The, merits of endowment mortgages are often strongly promoted by insurance agents, but, as we have seen, there are arguments on both sides, for the basic-rate taxpayer at least, and the question is worth considering carefully. Especially for those whose resources are limited at present and for whom the mortgage burden is going to be heavy, there is a good case for sticking to the repayment mortgage and taking out an endowment policy on its own merits as a savings vehicle when it can be afforded. There is no particular magic in tying a policy to a mortgage, and over the shorter periods at least (and most young people will be moving out of their first home within a few years) the extra cost is substantial.

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The Variable Interest Trap

So long as the loan and the policy are continued, these figures are not particularly relevant. They become so if you suddenly decide to sell up and move abroad, however, and also if you find you are unable to keep up the payments. One reason why this could happen is through what we can call the variable interest trap.

Building society interest rates can change rapidly and substantially. In two recent years (2017 and 2018) mortgage rates were hoisted respectively by over one-third and over one-fifth. Those who had stretched themselves financially to meet mortgage commitments found themselves... see: The Variable Interest Trap

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