Michael, 30, recently graduated from university, is single, and has just landed a successful job in the City, earning £90,000 per annum. This new stage in his life will mean he is to relocate from his previous home in Edinburgh but is hoping to buy a brand new flat in Canary Wharf and is set to have a mortgage of £300,000. He leads a very healthy lifestyle, exercises regularly and is a non-smoker. However, he suffers from asthma, which saw him hospitalised for two weeks when he was in his early twenties. He is looking for some advice as to what financial protection he will need to ensure his new life is as smooth as possible. He can spend a maximum of £60 a month. What recommendations can you make?
Bhupinder Anand, Anand AssociatesAs a single person, without dependants, life assurance is not particularly important and Michael probably benefits from a death-in-service arrangement anyway.
I assume Michael will also enjoy employer-sponsored private medical insurance and income protection.
Unless Michael feels that his risk of being made unemployed and the subsequent risk of not being able to find another job, is high, he does not need to consider accident, sickness and unemployment cover, which I consider to be largely a waste of money for many people.
He should concentrate his fairly limited budget on critical illness (CI) cover. His asthma should not cause too much concern but he may need to apply to several companies simultaneously for the best terms.
Given his income, £60 per month is not much to protect his future and Michael really should prioritise some more funds towards his protection needs. However, as a minimum he should create a financial cushion to at least cover the mortgage.
My recommended route would be an index-linked family income benefit policy, which could provide him with around £15,500 a year (first year) in the event of a serious illness. The index-linking means the true value of the cover keeps pace and remains sufficient to cover most of the mortgage outgoings, and the premium rises should be affordable. Michael should consider setting aside more monies for further, personal CI as a matter of priority.
Gerry Warner, ZurichAs a young, single man, Michael has no immediate need for life cover, even to protect his mortgage. Although he leads a healthy lifestyle, he should consider the possibility of long-term illness.
He should consider income protection (IP) as a priority. It is assumed that between his employer's sick pay scheme and his own funds, he would manage comfortably for the first six months of any long-term absence from work.
We would recommend a six-month deferred period and this would also reduce the overall costs than if a shorter deferred period had been chosen. Our benefit formula would allow a maximum benefit of £38,000 a year to age 60 at a cost £36.59 a month.
We would also recommend he gets as much critical illness (CI) cover as his budget allows so he has some means of reducing his debt should the unthinkable happen. Based on a likely 25-year mortgage term, a premium of £23.41 a month will secure a level sum assured of £101,014. His £60-a-month budget is a little on the low side given his overall salary, and we would recommend he forego just a few extra bottles of bubbly a month in favour of increasing his CI cover.
Of course Michael does have a history of asthma although seemingly well-controlled. If he has not had any symptoms in the past three years, or if any symptoms were mild, we could offer standard IP rates.
The picture is similar for CI. No, or moderate symptoms in the past couple of years would provide standard rates.
Mark Anders, Liverpool VictoriaMichael has some obvious protection needs, particularly as he has chosen to take on a large mortgage with his move to London. Assuming his employer is not going to provide any protection benefits, Michael could consider a range of protection benefits including life cover, critical illness (CI), income protection (IP) and possibly unemployment cover. Michael should also be aware that as an asthmatic with a medical history that includes hospitalisation, he may have to pay more for his protection contracts. His non-smoker status and regular exercise are a positive, but his premium loading would be dependent on a range of factors including the medication required to stabilise his asthma.
As Michael is single and assuming he has no dependants, his priority should be to maintain his income. As long as life cover is not a condition of the mortgage, his immediate product priority should be IP. He needs to establish how long his employer would be willing to pay him in the event of incapacity. If they would cover his pay for six months and he could insure 50% of his income to age 60, I would recommend a six months' deferred period for a guaranteed monthly premium of £35.60 with Liverpool Victoria based on a Class 1 occupation.
If his employer will only pay for three months, he could consider a contract with a three month deferred period, which would increase the premium to £53.80. It must be remembered Michael's medical history may lead to an increase in these standard rates.
By purchasing IP as part of a menu-based contract, Michael will have the flexibility to add other benefits. IP is likely to soak up his budget at this stage, but in the future he could consider the addition of life cover, CI and unemployment cover within the same plan.
