Last year, Nathan, 37, and his girlfriend Jemma, 32, bought their first flat together, with a joint repayment mortgage of £300,000 over a 25-year term. They did not opt for insurance at the time, but after finding out that Jemma is pregnant, they now want to make sure they are protected should something happen to either of them. They are both well, but only stopped smoking four months ago when they found out about the pregnancy. What should be on top of their list of protection priorities and what are their options?
John Joseph, John Joseph Financial Services
To begin, they need to look at taking out a mortgage protection plan and consider life cover, as well as critical illness (CI) and waiver of premium.
It is also important to check the difference in the cost of a joint life plan against that of two individual policies.
Nathan should consider personal life cover up to 10 times his salary, including the above mortgage protection plan in addition to personal CI. They should exclude any life cover or CI benefits provided by their employer as this is never guaranteed to be there if a client leaves their employer or the employer leaves the client.
Nathan and Jemma should jointly take out income protection (IP) up to the maximum permitted but include any IP benefit provided by their employer and see if it contains a "continuation option" on leaving service. The cover can then be maintained on a personal basis.
There is a possibility that Nathan would need to change his work schedule and the type of work he does in the event that Jemma would suffer from a critical illness or upon her death. Therefore, to protect Nathan and the new baby we need to look at life cover, CI, as well as a sum assured sufficient to provide an income to cover potential childcare, medical assistance, home help costs etc.
Ahead of the next review, each insurance company should be notified that they have not smoked for four months and that when both have not smoked for a year, they will reapply for non-smoker rates.
When that time has lapsed they should check if better non-smoker rates can be obtained elsewhere.
Mark Anders, Liverpool Victoria
Nathan and Jemma need to review their financial planning requirements as a matter of urgency.
With a baby on the way, significant mortgage debt and no protection in place, there are a range of protection needs they should consider. Life cover is a key requirement, both to cover the mortgage liability and to provide a lump sum, or income, on the death of either.
They may wish to consider decreasing term assurance to cover the outstanding mortgage through its remaining term. Joint life cover will provide the cheapest option but if their budget will stretch, they could even consider two single lives.
They should consider pension term assurance, which is available on a joint life basis, and will probably provide cheaper cover through the tax relief available.
With a baby arriving imminently, it would be advisable to top up the life cover. Family income benefit could provide an affordable alternative to lump-sum cover and would ensure an income is available on the death of either parent. Writing the policy for 21 years would ensure that income was available throughout the child's dependant period.
Nathan and Jemma need to ensure they have protection in the event of illness or disability. It would be good to provide an element of critical illness and income protection (IP) cover, but if budget is limited, IP should take priority. If either is planning to stay at home and look after the baby full time, IP for 'house persons' is worth considering.
As Nathan and Jemma have only recently stopped smoking, most providers will only offer smoker rates for their protection policies, which will increase the couple's initial costs significantly.
Many will allow non-smoker rates after one year, so they must remember to inform the provider once this has been reached to keep their costs down.
Roger Edwards, Bright Grey
When Nathan and Jemma bought their flat they probably decided against protection because of cost – or perhaps, being young and healthy, they felt they did not need any. However, with a baby on the way, the right protection is essential to provide their son or daughter with a financially stable lifestyle.
It makes sense for them to immediately consider debt repayment and income replacement in case either of them died and income replacement on occupational disability for Nathan, assuming that he will be the main income earner during Jemma's maternity leave.
They should then review their income protection arrangements when Jemma makes her decision about returning to work after the birth.
So a menu protection product with a lump sum to clear the outstanding mortgage, combined with family income benefit to provide an income on death for a term until their child is 18, plus additional income protection for Nathan would be a good starting point. They should also consider what percentage of their income to protect, but 50% would be a benchmark.
They should certainly consider a product that includes a 'birth' insurability option so that they can review their cover when the baby arrives.
As ex-smokers who have not yet been smoke free for 12 months, they will pay more for their cover as they will still be classed as smokers. So they should consider a provider that will allow them to switch to non-smoker rates once they have given up for more than 12 months.
A plan to cover their mortgage and to provide £1,000 per month income benefits, as described, would cost £109.03 per month. This would be reduced to £59.67 if they stay off the cigarettes - therefore providing them with a great incentive to do so.
