Case study

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Caroline, 25 and John, 30, are about to have their first child. Caroline works as a PA and John works for a management consultancy firm in London. They have a combined salary of £45,000. They do not have insurance of any kind, but are aware they need to consider getting some form of protection now that they are about to start a family. They are on a tight budget and would like to weigh up all their options, but they don't know where to start. What recommendations can you make?

Andrew MacLellan, Millfield Partnership

Prioritising their needs is key for John and Caroline, and I would propose income protection (IP) plans for both of them with a monthly benefit of £938, assuming equal salaries of £22,500. The cost would be £11.90 per month for John and £18.21 per month for Caroline.

If they decided to take paternity or maternity leave, then their respective cover would reduce to £833 per month. Both premium and benefit are linked to increases in the Retail Price Index (RPI).

The most cost effective plans are provided by BUPA. On the basis of the greater risk, both plans should run until their 65th birthdays, respectively. Eligibility for State benefits may further increase their household income.

The risk of death is statistically much less than long-term sickness or disability during the period that ends with John and Caroline's child's 21st birthday.

I would also recommend life assurance, in this case, family income benefit (FIB) plans, as payments after a death are straightforward.

Both plans have a 22-year term and are based on their net incomes, indexed to the RPI. These are estimated as £1,192 per month each, assuming equal pay, and net of tax, National Insurance and employee pension contributions.

The lowest monthly cost plans are offered by Legal & General with £9.03 per month for Caroline and £12.42 per month for John. The payments are tax-free except for Inheritance Tax, which could be avoided with the use of trusts.

Alison Turner-Holmes, Skandia

Being so young, John and Caroline would probably benefit from long-term protection products.

The advantages of a whole of life (WOL) policy can be used by this couple, enabling them to be underwritten now and potentially never again. In other words, they could have the same guaranteed cover for their lifetime. They might consider taking out a WOL, death or earlier critical illness (CI) policy each, written in trust. The extra premium for two plans is so much more cost effective than for any joint life policies. £100,000 on each of their lives could be used to employ quality childcare in order to enable them to carry on working or subsidise their salary in order to look after the child.

Skandia's policy would also cover the baby after 30 days until it was 18 years old for £25,000 on each plan; a potential pay out of £50,000 should the child sadly suffer from a CI.

Caroline and John would also have mastectomy cover, which Caroline may be concerned about, and John would have prostate cover, something very much in the mind of many men these days. The plan would offer a wide range of guaranteed insurability options, allowing them to increase their cover in the future and even on the birth of the child in July.

The Skandia rolling term plan would enable them to budget their outgoings as premiums are guaranteed for 10 year periods. This could be obtained for £52.05 per month.

Mick James, Standard Life

As we don't have all the details of John and Caroline's financial situation, let's stick to the basics and assume that John earns £30,000, Caroline is on £15,000 and they've got a mortgage of £130,000, but no other debts.

On death, I would recommend enough life cover to repay their mortgage. I would use a simple life assurance plan for this, on either a level or decreasing basis. Next I would want to cover their respective incomes with a family IP plan, written under trust. In terms of CI, the options are either a separate or accelerated CI plan to cover their mortgage and an IP plan to cover their income requirements.

Affordability is an issue for Caroline and John, so they need to consider their hierarchy of needs and find ways to keep costs down while maximising cover. Taking the basic protection need, life assurance, as an example; a 25-year, joint-life mortgage protection plan for £130,000 would cost them £10.85 a month.

They could effectively double their cover without doubling the cost, by buying two single-life plans. John's plan would cost him £9.62 and Caroline's only £6.71 a month. They can also save nearly £13 a year if they choose to pay annual premiums. On an annual basis, John would pay £108.40 and Caroline would pay £74.60 a year, a saving of 6.5% a year, or the same as getting roughly 18 months cover for free.

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