Tom, 27, an advertisement manager, has recently taken out a joint mortgage of £175,000 to buy a one-bedroom house in East London with his girlfriend and would like to take out joint life assurance cover. Sophie, 28, earns £35,000 a year. Tom's salary fluctuates annually between £25,000 and £40,000. Both are in good health and do not smoke. Sophie would also like to take out some critical illness cover while Tom would prefer to examine all their protection needs. They each have a budget of £35 a month. What are their options?
Kevin Carr, LifeSearch
Assuming a 25-year mortgage, joint life cover for the mortgage shouldn't cost more than £10 per month per £100,000 of cover. Critical illness (CI) cover, which pays a lump sum in the event of diagnosis of a specific condition, could be included with the life cover for an extra £35 per month.
However, instead of CI, I would suggest Tom and Sophie consider individual income protection (IP) policies to protect their monthly income. IP cover is more comprehensive and can also include cover against unemployment. Unlike CI cover, there is not a specific list of conditions so any medical problem would be covered, in particular it covers common conditions such as depression and back problems, which are not covered by CI.
IP for Tom, with a six-month deferment period, would cost less than £15 per month to insure his salary at £1,500 per month – tax free – against illness, and would pay every year until his 60th birthday if he was unable to carry out his own occupation through ill health. Cover against unemployment for one year can be added at an extra cost.
On average, health insurance is slightly more expensive for females, so similar cover for Sophie could be arranged at around £19 per month.
It is important that both Tom and Sophie check what benefits they are entitled to from their employers and then set the IP deferred period to match this, as benefits cannot be received from both the employer and the insurance policy.
Alison Turner-Holmes, Abbey for Intermediaries
The key to Tom and Sophie's needs is flexibility. Because they are still young it is likely their circumstances will change over the years.
To cover their needs I would recommend a Scottish Provident Self Assurance plan. This should consist firstly of joint life, first event, level term assurance of £175,000 offering death only, covering the amount they have borrowed for their home.
The CI cover Tom and Sophie are looking for needs careful consideration, the best suited would be £90,000 on a family income benefit basis for each of them. This would allow them to keep up monthly mortgage repayments and payments on other liabilities should one of them suffer a critical illness.
There is free cover during underwriting which is important since they are already vulnerable having started the mortgage without any protection. This option also includes buyback and an own occupation total permanent disability (TPD) definition. For £25 a year, buyback will provide an additional £45,000 of cover on a second policy after the first one has paid out.
Having CI cover on a family income basis means Tom and Sophie can afford to take out IP too. This would be £69.17 per month after discounts.
The plan includes guaranteed insurability options to give them the flexibility to add or change their cover in the future, as well as immediate cash benefit and children's income benefit free of charge.
Roger Edwards, Bright Grey
Tom's idea of examining all of their protection needs is a good one. They should seek independent financial advice in the first instance. An adviser is best placed to assess all of their protection needs and advise accordingly.
Tom and Sophie's main priority should be to pay off the outstanding mortgage in the event of death or a critical illness. This being the case, and assuming they have a repayment mortgage, I would suggest they take out a joint decreasing life and CI policy for £175,000.
Although this joint policy would pay off the mortgage in the event that one of them should die or suffer a critical illness, they should also consider their other day-to-day living costs. It is no use paying off a mortgage and then discovering that you can't actually afford to live in the house.
One option would be separate single life and CI policies to give them extra protection. Another option would be to add an extra 'debt safety net'. The amount of cover will depend on their circumstances, however there should be at least enough cover to pay off other outstanding debts.
Once they have life and CI policies in place, they should also consider some form of IP. If one of them were to become unable to work due to long-term sickness or unemployment, they may still need an income to cover day-to-day living costs. Bright Grey can cover up to 55% of salary.
