Debt-free is the target

Don't let your investment plan get into bed with your insurance
I have a $100,000 mortgage and about $40,000 in a savings and protection plan and have received $20,000 in cash. I have no hire purchases or large credit card debts and am in my late 40s. The savings plan returns very little and I have cut my contributions right back to allow money for the mortgage. Over the years I have argued with my broker that people say ''pay off the debts first'', but the broker says, ''no, you will reap a good reward over time''. What do you think? Fundamentally you are right, debt-free is the ultimate target of us all ? any debt equates to an increase in risk. However, there are several points of argument. I assume the mortgage is on your home therefore is not exposed to any taxation benefits. If this is the case and you are earning an average to good salary you will be paying tax at around 24-26 per cent on each dollar of interest paid. Or put another way, each dollar of interest you pay requires you to earn $1.30 gross. The $40,000 in savings also is not very effective if it is not earning more than the pre-tax equivalent of the mortgage cost. For example, why have that sum invested at say 7.25 per cent pre-tax (5.51 per cent after tax) when the mortgage interest is say 8.25 per cent (10.73 per cent taking into account the extra you need to make up what you could have been receiving if the property was not residential, if you had enjoyed the tax benefits of the property as an investment). The plan you are in is not a smart option if the fund supporting that investment component is taxed at 33 per cent ? regardless of the investment return. My view is that investment and insurance in one plan are not usually good bedfellows. The expenses/fees tend to merge, the insurance component is not easily dealt with or assigned if required, and the investment performance not what is expected by the client. I suggest you separate the insurance and investment. If you require insurance, arrange that in a stand-alone plan. Take the investment funds along with the savings and repay the mortgage. This week's columnwas supplied by Phillip King. He can be contacted at phillip@ecf.co.nz. Always take specific personal advice in respect of any matters dealt with in this column. Email your queries to: chris.ollington@theaucklander.co.nz. Please state if you would not like your query published.