Jack Selway is 32-years old and a self-employed electrician based in the South-East. He is a smoker and is currently single. Jack took out a decreasing term life assurance policy with his mortgage and is now looking to take out an income protection plan. On average, Jack earns £32,000 a year and his mortgage repayments stand at £600 a month. Aside from his mortgage, Jack has no other outstanding debt and has savings of £4,000. What are his income protection options?
Diane Saunders, Diane Saunders Financial Adviser
An income protection (IP) policy should be everyone's first policy. Not many of us can manage without next month's income and the prospect of losing this for a prolonged period of time would result in financial disaster for most of us.
Jack could probably manage for three or six months by using his savings and any outstanding invoices for income. He should set up an IP plan to age 60 or 65, and I would want to confirm his income with his accountant or through tax returns, as there is no point in over insuring if he could not substantiate the income when making a claim.
The only plan worth considering provides benefits based on 'own occupation'. The plan should also be indexed to ensure the value of the benefit is maintained.
Guaranteed premiums are important. Reviewable premiums may not be much lower than guaranteed rates, but could rise significantly if the insurer decides they need to increase charges because of an increase in claims or a rise in company costs.
If Jack wanted to insure maximum income based on his salary, there is a surprising difference between insurers; from £12,000 per year with Unum Provident to £17,592 with Scottish Equitable or Bright Grey.
The lowest monthly costs for £1,200 monthly benefit, guaranteed rates, indexed, own occupation, six-month deferment period to age 60 is £57.03 or £71.63 to age 65, both with Scottish Provident.
Nick Homer, Norwich Union Healthcare
Being self-employed, Jack will ideally want his IP benefit payments to start as soon as possible. Also, he will probably want the maximum level of cover available – 60% of gross earnings from Norwich Union Healthcare – because benefit is calculated on 'personal taxable earnings' which self-employed people often seek to minimise.
Jack can have a maximum initial benefit of £1,600 per month. This is index-linked and equates to 82% of his net earnings. If he wants benefit payments to start after a four-week deferred period and continue until he is 65-years old, the cost will be £188.97 per month.
However, Jack has the ability to utilise his £4,000 savings in the event of being unable to work. His savings would provide him with a monthly income of £1,333 for three months – around 70% of net earnings. This is probably adequate in the short-term because Jack's business is unlikely to have any major fixed overheads. Also, it may well be supplemented by State short-term lower rate Incapacity Benefit (IB) of £242 per month. This enables Jack to select a deferred period of 13 weeks, reducing his monthly premium to £96.30. Jack could reduce the premium further to £66.50 per month by selecting a termination of age 60. This is usually possible if all significant financial overheads, such as the mortgage, will be paid off by this time and a pension can be drawn.
If Jack was comfortable to assume that he would be eligible for long-term State IB, then he could reduce his benefit to £1,280 per month, with a cost of only £53.80 per month.
Helen Collins, Liverpool Victoria
Jack is self-employed and could be considered to be in a vulnerable position as far as income continuation is concerned. He has rightly covered his mortgage against death, although one could argue that he did not need this, as he is currently single. On the other hand, however, should he have a partner in the future, taking out mortgage protection early was wise, especially as he is likely to have higher premiums due to being a smoker.
Jack is now thinking about protecting his income in case of sickness. There are several options he needs to consider, including protecting his mortgage payments, daily living costs and health against serious illness.
All three of these options need to be carefully considered almost on a cost benefit basis. With an income protection plan, Jack could cover around 50% – 60% of his gross income should he be unable to work due to sickness or accident.
Equally important however, is that Jack chooses a plan which has a variety of options and can change when his circumstances alter. Obviously, cost may be an issue to Jack, and therefore it may be an idea to cover all of one element and some of another.
Jack needs professional advice in order to assist him in choosing the right option. He may already have a financial adviser but if this is not the case, then he should consider asking for help to ensure that he has the right combination of cover. However, this should not be a 'one off' exercise, he needs to consider a protection package that not only meets his immediate needs, but has the flexibility to change to fit his future circumstances.
