Emma, 28, works for a local firm and earns £23,000. She lives in a flat with Mia, her seven-year-old daughter. Emma bought her flat three years ago and has an outstanding mortgage of £65,000. She is a non-smoker, in good health and has savings of £3,000, which are kept in an Isa. Although she could not afford protection when she bought her flat, she is now interested in purchasing life cover and some form of additional protection. What cover options are available?
As a single parent, Emma needs to consider two potential disasters: first, what if she dies before Mia grows up and second, how will she live if she becomes too ill to work?
Emma also needs to consider who would look after Mia. Has she made a will and appointed guardians for her? If not, she needs to do so immediately.
Plain 'vanilla' term assurance will provide a lump sum that can be used in various ways to provide an income that will cover Mia's expenses. Depending on her age, her guardians may choose to pay off the mortgage and rent out the flat until Mia can live on her own, or they could invest the money on her behalf.
Although decreasing term policies have slightly cheaper premiums they offer poor value, as the premiums remain level but the benefits reduce. This plan should be written in trust, with at least two trustees, one of whom should not be a guardian.
Looking at the current available rates, Emma could cover the mortgage for £6 a month for 15 years, which would allow Mia to attend university, but for just £6.39 a month, she could have £100,000 cover, which would secure Mia's financial future.
Emma also needs to consider how she would live if she became too ill to work due to an accident or a long-term illness.
Her individual savings account (Isa) would cover around three months of basic expenses, but I would recommend an income protection (IP) policy to pay her an income if she cannot work at the end of this time until she either goes back to work, retires or dies.
At current rates, for £27 per month she would receive £958 per month tax-free, in addition to State benefits.
Roger Edwards, Bright Grey
Although she is currently in good health and she has started to save some of her earnings, mother and daughter's financial situation could suffer if Emma was suddenly unable to work due to sickness or disability.
The £3,000 in her Isa would not keep the bills paid for long if the income stopped coming in. Assuming her employer continues to pay her salary for six months if she becomes ill, Emma should consider IP of up to £12,650 with a six-month deferred period and cover up to age 65.
As she does not have a risky occupation, Emma should have no problem applying for an own-occupation definition.
For the mortgage – assuming it has 22 years to run – Emma needs to consider life or critical illness (CI) cover for £65,000 on a decreasing basis for that period.
Finally, for the extra life cover she needs, Emma should first check what her death in service benefit is. Assuming that it is four times her salary, she should be looking to receive around £140,000 more for the period until Mia is at least 21 – which is 14 years.
Emma can get all this protection within one menu plan – Protection from Bright Grey. She is young and healthy and should face no underwriting extras. IP cover will cost her £24.59 a month, life and CI cover will cost £8.21 and life cover will cost £5.24. This is £41.86 per month including waiver and the plan fee. Emma could inflation-proof her IP for an extra £6.60.
Nick Kirwan, Abbey for Intermediaries
It is good that Emma is thinking about life assurance, but her needs go so much further than this.
To establish her priorities, Emma and her financial adviser should work out what would be affected if her income disappeared.
Her first priority will probably be to ensure her mortgage is covered against both death and critical illness. If money is tight, she can take this out on a death or earlier CI basis, as this is often cheaper than taking them out as standalone policies. It is also possible to take it on a decreasing basis, which will work out even cheaper.
However, she should also consider the other necessities she relies on her income to pay, for example, household bills and child care. As a single parent, she obviously depends heavily on her income, which is why it is important she ensures it is protected. The solution to this would be to ensure IP is included in her policy.
If Emma took out her CI and IP in Scottish Provident's Self Assurance plan she would get children's income benefit at no extra cost. This will pay out an income to her if her child becomes critically ill, which is in addition to the lump sum she would get as part of her CI plan.
For £65,000 worth of death or earlier CI cover (decreasing term, own occupation, total permanent disability) and IP (a 22-year term to cover half of Emma's salary, with a 26-week deferred period), the premium as at 24 November 2003 would be £23.04.
