Richard, 35, and his wife Claire, 32, live in London. They have an 18-month-old son called Samuel. Richard is a journalist and Claire is a part-time secondary school teacher. Their combined salary is £52,000. They recently bought a new house and as part of the purchase, they took out mortgage payment protection insurance, which is currently the only protection they have. Ideally though, they would like to get more comprehensive cover. However, they cannot spend more than £80 a month. What options are available to them?
Richard Verdin, Direct Life and Pension Services
We have assumed that Richard is a self-employed journalist who does not work abroad, and that he is on a gross salary of £40,000. Because he is self-employed, he has no sick pay. Meanwhile, we have assumed that Claire is on a salary of £12,000 and is paid full sick pay for six months.
With regard to the mortgage, we have assumed this is a repayment mortgage of £150,000 over a 25-year term, with a typical repayment of £930 a month.
The first priority is to take out a mortgage protection policy to pay off the outstanding mortgage balance in the event of the death of either life. The surviving partner could then remain in the family home without the burden of a mortgage or having to sell the property.
This cover is provided as two separate policies. This costs very little extra and in the event of a claim on one of the policies, the second policy would remain unaffected.
The next priority is to protect the mortgage payments with a level income protection plan with a term of 25 years, providing £930 a month with a four week deferred period if Richard was unable to work due to a long-term illness. If the monthly mortgage payments could not be met, the clients would risk losing their home.
Finally, a family income benefit plan protecting Richard to age 65 would provide a continuing income to Claire, in the event of his death. It provides a tax-free index-linked benefit of £1,050 a month, and would help Claire provide for their son. This would also allow her to pay for childcare, should she wish to continue working.
By using our Intelligent Protection system - which helps intermediaries choose the products they should recommend to their clients - to source these benefits, the standard premium for all the above benefits equals £79.96 a month.
Steve Casey, Bupa
It is pleasing to see that both Richard and Claire recognise that they need to review their cover. Looking at their needs, we would suggest life cover to protect the mortgage. For a little extra, they could take out single life policies - rather than a joint life first death policy - each for the amount of the mortgage. To keep costs down they should look at decreasing pension term assurance (PTA). This would enable them to claim tax relief at the highest rate they pay. A £300,000 PTA from Bupa would cost £22.72 for Richard and £15.16 for Claire. Consideration should also be given to purchasing family income benefit, particularly on the life of Claire.
They should review their mortgage payment protection insurance policy, - particular, a review of any exclusion is a must. If Richard does not have a group income protection (IP) policy via his employer, he should look at protecting his income. Again to keep costs to a minimum, a product that may pay a benefit for a limited term or perhaps rather than purchasing full IP cover, they could look at covering 150% of their mortgage outlay to cater for monthly bills, such as Council Tax.
Finally, budget permitting, critical illness (CI) should be considered. If they are unable to afford cover for the mortgage amount, then reduced coverage is an option. They should seek independent advice as to a comprehensive product with additional features such as help lines, best doctors and reinstatement options. This is particularly key if either of them has the misfortune to suffer a critical illness as they will be able to maintain coverage to protect Samuel. A £100,000 life or earlier CI joint plan would be £48.85.
Ian Jefferies, Friends Provident
Within the £80 a month budget, the key elements of cover should be to provide an income if Richard is incapacitated and life assurance for the couple's mortgage. Additional cover to maintain the family's lifestyle is also important.
We have assumed that Richard earns £37,000 of the £52,000 and that they have a joint repayment mortgage of £175,000 over 25 years. Richard has no death in service cover while Claire has two times salary (£30,000). The family can survive financially for six months if Richard cannot work and mortgage protection payment insurance (MPPI) will be cancelled, saving them £35 a month.
Core to our solution is Friends Provident's income protection (IP) for Richard, providing an annualised benefit to age 60 of £21,000 tax-free with automatic annual increases, deferred 26 weeks for £28.82 a month. This is alongside two pension term mortgage protection plans - 25 years, £175,000 for £17.54 net providing double cover - costing only a few pence more a month than a joint life conventional mortgage protection plan.
For family protection beyond the mortgage, Richard could take out a 20-year pension term assurance (PTA) plan of £200,000 in trust for family costing £17.10 a month during Samuel's dependency, and for Claire over 20 years for £100,000 at a premium of £5.76 a month.
Finally, we suggest a 20-year, £150,000 critical illness (CI) plan for Richard, to cover most of the mortgage or lifestyle adjustment. The total monthly cost is £116.74 less MPPI, which totals £81.74 a month.
PTA plans can be replaced with conventional term assurance without re-underwriting in the unlikely event of exceeding lifetime and annual allowances. Ideally, more CI cover for Richard and Claire would be included plus IP for Claire - but not within this budget.
