Sarah, 37, recently separated from her long-term partner with whom she has two children; Emilia, five, and six-month-old Daniel. As their house belonged to her ex-partner, she had to move and now rents a two-bedroom flat for £1,000 a month. As a GP, Sarah earns £65,000 a year, however, she is concerned about becoming ill or injured and being unable to work. She is looking at taking out some protection but is unsure what cover she needs the most. Both Sarah and Emilia are healthy, but Daniel was born premature at 30 weeks and had to remain in hospital for a few months. What recommendations would you give her?
James Brooke, Anand Associates
Sarah's family is only financially secure if she is healthy enough to continue working. The first thing to do is establish what benefits, if any, she has as a result of being a GP. On the basis that she is in a small private practice and, therefore, has no employee benefits, she will need to protect her income against being unable to work due to long-term disability. Assuming her essential monthly expenditure is around 50% of her salary, she could protect 50% of her income to age 60 for about £130 a month on a guaranteed premium basis.
Although Sarah may feel that private medical insurance is important as her son had to remain in hospital for a few months after he was born, both life and critical illness (CI) cover are more important as it would not be fair to leave a financial burden on whoever the children's guardian would be if she died. If she has outstanding debts or intends to have a mortgage she will need to consider a lump-sum policy sufficient to pay off the debt when she dies or if she suffers a critical illness.
Assuming inflation of 2.5% a year and an investment return of 5%, she would need a lump-sum policy of around £457,500 to generate £32,500 index linked. As a level-term, life-only policy, this would cost about £29 a month. Alternatively, a life-only family income benefit policy could provide this income for about £23 a month. With CI, the figures would be around £177 and £147 respectively.Roger Edwards, Bright Grey
It would be worth checking any protection policies Sarah held jointly with her ex-partner. The majority of people in these circumstances can lose valuable cover by cancelling their policies. If they contain any insurability options on separation it would be worth Sarah considering exercising the option to get some cover for herself. Her immediate priority, however, is to ensure that her income is protected and that the family finances are secure if she becomes ill and is unable to work. Even though she does not have a mortgage, the £1,000 a month rent is the equivalent of a monthly mortgage payment and this needs protecting. Assuming that at some point in the future Sarah does take out a mortgage then any protection she takes out now will also protect the mortgage payments. Sarah should consider taking out an income protection product for 50% or more of her salary for a term of 23 years until she is 60.
As a GP she would have no problem getting cover on an own occupation basis and the fact that her son was born prematurely would also not affect the underwriting of the policy. This could cost from £90 a month on a deferred period of 26 weeks, so Sarah may want to try alternative deferred periods and benefit amounts to fit her budget. She should also consider what would happen to the children if she died. A family income life policy paying the same income over the same term could increase the cost by around £24 a month.Ian Brown, Skandia
Sarah's NHS employment will qualify her for a level of sick pay and membership of the NHS pension scheme, which should give her life cover of £130,000 plus a dependants' pension and the potential of an income if she is forced to retire early through ill health. However, as a GP, Sarah will be only too aware that the risks we all face of serious illness or injury throughout our lifetime are far more likely than dying young.
As a mother looking after two children on her own she will have concerns about being unable to look after them if she suffers from an illness or injury. Sick pay will help but may not provide enough financial support in difficult times.
Sarah should consider life and critical illness cover and should make sure she is covered for a comprehensive range of conditions. With her medical expertise she will be well aware of the incidence, prevalence and potential severity of different illnesses. She should also consider whether her children are covered. A Skandia Protect policy would include children's benefit at no extra cost and will cover Emilia and Daniel until their 18th birthday (excluding any pre-existing conditions) at no extra cost. She should disclose the premature birth of Daniel, although it should have no effect on his cover.
With good advice, Sarah can plan her future knowing that the financial health of her family is in good hands.
