Claire, 27, works full-time as a freelance illustrator. Her average annual earnings amount to £18,000, although her monthly income varies throughout the year. She has savings, which also fluctuate between £4,000 and £6,000, as she sometimes has to dip into them when her earnings are down. Claire has recently bought a flat in Sheffield and has an outstanding mortgage of £75,000. She would like to buy some form of income protection - what options are available to her?
Tony Clements, IFA at Millfield Partnership Limited
We would first need to calculate Claire's monthly expenditure, including her mortgage, and then set the level of cover accordingly. Claire has a choice of income protection (IP), mortgage payment protection insurance (MPPI) and critical illness (CI) cover, or a combination of all three.
It would be advisable to use a CI policy alongside IP because she may contract a serious illness but still be able to continue working, and therefore would not qualify under the IP conditions. A combination of IP and CI cover would therefore be the optimum solution for Claire, although affordability could prove an issue. If this were the case, then Claire should consider IP before CI cover. So for the purpose of this answer, we will consider the IP options.
For IP, the most appropriate deferred period would be 13 weeks, as Claire has sufficient savings to cover her cost of living for this period. A shorter period would increase the premiums significantly, and a longer period would leave Claire struggling to maintain her mortgage payments as well as her standard of living. Bright Grey offers the most competitive cover of £9,900 for £19.94 per month. Alternatively, if Claire's budget permits, we would consider Friends Provident's policy which offers increased coverage and more flexibility. The premium for a maximum annual benefit of £11,793 would be £35.55 per month. Both figures are based on a 13-week deferred period with cover ceasing at age 60.
Mark Anders, Liverpool Victoria
IP is a vital component of any financial planning package for the self-employed. Claire's income could be severely impacted if she were unable to work even in the relatively short-term. In many cases an employer will continue to pay employees for a certain length of time, and at least an employee will also benefit from statutory sick pay.
With no IP, Claire would be reliant on qualifying for Incapacity Benefit, which would be payable at £55.90 per week for the first 28 weeks, £66.15 per week up to 52 weeks and £74.15 thereafter.
Claire has a number of options she could consider. She could take out IP to cover a proportion of her salary up to her anticipated retirement age. This would probably provide the most effective solution for Claire in terms of safeguarding her income. However, this solution may be beyond Claire's budget, particularly if she chose a short deferred period, which is preferable for the self-employed. Claire's fluctuating income may also restrict the commitment she can make to a monthly IP plan.
It may be more appropriate for Claire to consider MPPI, which would link the benefit payable to her mortgage payments. This would at least provide security for the property she owns and this could be taken out to cover incapacity due to accident or sickness. She could even consider including unemployment cover.
If Claire's budget for providing cover is even more limited, both IP and MPPI can be done on a budget basis, which would restrict the benefits payments to a maximum of 24 months. Claire could also juggle with guaranteed or reviewable rates to tie the premiums to her budget.
Gerry Warner, Standard Life
Unfortunately for Claire, the special skills and talents that she needs to perform her role as an illustrator do not, in our view, render her a particularly good risk in IP terms and Standard Life would be unable to offer her this type of cover.
This is because Claire's profession exposes her to a number of health risks. For example, she is at high risk of repetitive strain injury, which is sometimes known as work-related upper limb disorder or occupational overuse syndrome.
She would also be at risk of musculoskeletal disorders caused by working in awkward positions, incorrect posture, and long periods of sitting or standing and making repetitive motions.
Also, it could be difficult to gauge the level of benefit Claire should seek or could be offered. She could be remunerated in a number of different ways, for example by salary, bonus, sponsorship or endorsements and how much she earns is likely to be dependent on her performance and success in the role.
It's also possible that she will work on relatively short-term contracts. In summary, Claire's earnings could fluctuate considerably over short periods of time.
Some providers may be able to offer Claire cover with a longer deferred period and an 'any' occupation definition of incapacity, or perhaps activities of daily living. However these are terms and conditions that Standard Life does not offer under its IP plans.
