should I cash in this policy to pay off debts?

[drivingmisscrazy]

please note, all amounts are in EURO (before you slag me off for being uber-extravagant!)

Background: DP and I once earned plenty of money and were profligate with it...we now have about ?20k of unsecured debt (car loan, overdrafts, credit cards). In the meantime, we have a DD, DP is on a career break, and my income has fallen by 25% (through pay cuts and tax rises). Roughly our situation is this:

income ?4500 per month (+ 140 CB)

outgoings ?2000 mortgage; ?750 repayments/bank charges etc; ?250 childcare; ?200 insurance (life, car, house); ?250 bills (gas, elec, bins, broadband); ?195 savings

This leaves us about ?850 for everything else - food, repairs, fuel, phone credit, clothes, medical bills (?55 per GP visit), petrol. We also have to visit the UK fairly regularly to see my mother, and DD's dad. We are struggling, although we have cut back on many things - although on paper we should be fine. Every month there's something costly - car tax ?300, or UK visit, or servicing something which leaves us skint.

My question is: I have an endowment policy due to mature in 2018, but its encashment value would pay off all our debt and leave about ?5k to reinvest and add to. By my reckoning, it would take us about 10 years of finding another ?200 per month to pay off our debts. Interest rates are going to go up, and taxes and costs are going to go up. Should I cash it in and be debt free? Is there any good reason not to do this, especially given that both DP and I stand to inherit amounts in the next 10-15 years equivalent to the mature value of the policy? It would (1) give us more disposable income and (2) ease anxiety

sorry those question marks are supposed to be euro signs...

How much would you lose by cashing in the policy early? If it is less than you will be paying in interest on your debts between now and when the policy matures anyway (taking into account any penalties for early repayment), then I would say it's a bit of a no-brainer, because it will actually save you money in the short and long run.

If you will lose out overall by cashing in early, then I guess you need to decide whether the extra disposable income and peace of mind is worth what it will cost you.

I think about ?7k; I'd walk away with about half of the projected final amount, but I've another 8 years of payments to make, and by my estimate our costs on the overdrafts and credit cards alone would come to about 18k in the same period (it's really shocking when you look at it like that ). So I can reinvest the premiums I'm currently paying, plus the smallish lump sum left over in a high interest account, and that will net me about the same overall total in the end, plus in the meantime we'll have about 750 per month extra, some of which we will try to save for DD's education (should she want one!)

Sounds like the right thing to do then!