Ed and Katie are both 37 years old. Ed is a pilot in the RAF and Katie is a freelance journalist. They have a child, Archie, who is nine months old and a repayment mortgage of £62,000 left on a 19-year term. They are looking to take out life assurance or protection to ensure they do not suffer financially if one of them should die or fall ill. They already have private medical insurance, but want to cover all their protection needs as new parents. Good, solid cover is more important than cost. What should they consider?
Peter Chadborn, Chadborn Baker & Kearle
The priority for Ed and Katie is to cover their mortgage debt. The most cost effective method would be a mortgage protection policy. Since the debt only needs to be repaid once, joint life, first death basis would suffice.
They recognise the need for solid cover over cost, so a policy with comprehensive critical illness (CI) definitions would be most appropriate. It should be tailored to the amount and term of the mortgage, have guaranteed premiums including waiver benefit, and would cost £41.16 per month.
Ed and Katie should protect themselves against long-term incapacity. The RAF provides generous sick pay benefits so the main concern is Katie's income. A personal income protection (IP) plan is recommended, with a deferred period set to match their ability to manage without Katie's income and an index linked benefit set at a level that would maintain their standard of living. Features and flexibility would take precedence. Bright Grey would be a good choice as it would consider an 'own occupation' definition for a freelance journalist.
They should also consider additional life cover to ensure Archie's present and future financial security. Although the RAF's death-in-service benefits are assessed on an individual basis, the priority is to provide approximately £200,000 level term assurance (LTA) for Katie. LTA would be preferable over family income benefit as cost is not an issue and the provision of a capital sum would offer more choices. It is essential that this policy be written in trust to ensure speedy and accurate distribution.
Sue Wilkinson, Abbey for Intermediaries
It is good to see that Ed and Katie wish to focus on finding 'good, solid cover' rather than the cheapest that is on offer.
This is often music to a financial adviser's ears, especially when they are in competition with supermarkets that can sometimes offer basic and often inadequate cover.
IP cover and unemployment benefit should be a key priority, especially as Katie is self-employed and has a child to look after. However, as Ed works in the RAF, he should check the extent of the cover offered here first so that there is no duplication.
They should also consider lump sum protection to pay the outstanding balance of their mortgage. As a minimum, they should have a joint life death or earlier CI protection on a guaranteed basis. This would cost £53.21 per month for £62,000 worth of cover. Alternatively, a better solution could be two single plans, which would give them cover of £124,000 for just £57.56 per month. If they have both IP and CI, they would automatically receive free children's cover, not just for lump sum CI, but an income to the parent, which could allow a change in working habits or pay for a carer. These benefits would not add any extra to their monthly premium.
Finally, writing the protection under trust, where appropriate, should be a key consideration.
Peter Hamilton, Friends Provident
This case is interesting because of the specialist occupations. On Ed's death or incapacity while in the armed forces, he or his family would be entitled to the benefits provided through his employment. In addition, Friends Provident would be able to offer Ed life cover in relation to his mortgage.
For Katie, life and CI cover for the mortgage is recommended, which on its own would not be adequate with a dependant child needing to be protected, possibly for 20 years, including, potentially, education costs. Assuming a salary bracket of £25,000 to £35,000 for Katie, term cover for 20 years for £200,000 at a monthly cost of £16.65 would be a starting point for discussion.
To this would be added the monthly cost of the mortgage cover mentioned earlier totalling £37.52, including an increase for Ed's occupation. Based on the likely income from their occupations this seems affordable. Another approach could be joint life mortgage cover with separate CI for Katie.
It is unlikely that Katie has any IP in place and, being self-employed, this is a key need for her. Assuming her income would support a benefit of £15,000 per year, which would be paid tax-free, this would cost £62.85 per month with cover running to age 60. Because of Katie's specialist occupation, the definition used would be based on incapacity tests rather than Friends Provident's usual 'own occupation' definition.
