Being married to a high earner meant Mrs W was used to a good standard of living. The company Mr W w...
Being married to a high earner meant Mrs W was used to a good standard of living. The company Mr W works for provides a comprehensive range of employee benefits including free life cover, pensions for widows/dependants, and an excellent sick pay scheme.
To Mrs W, this meant financial security, in sickness and in health, until she fell out with her, now, ex husband. With no dependants to worry about, their divorce was a clean break and Mrs W became Ms T. From the divorce she had some capital as a deposit and with her salary of £26,500, a mortgage was secured so she could buy her own house.
But what of the financial security? Effectively single, Ms T had to look out for herself ' and consider the 'what if' scenarios. The mortgage lender, as is often the case, wanted basic life cover to protect the loan but to Ms T, her own death was not a financial issue. With no one who would be financially dependent on her should she die, it was understandable that her view was what does it matter. The lender was persuaded to accept this view and agreed not to insist on life cover.
On the other hand, getting seriously ill was a major issue. For Ms T, and anyone in her position, two aspects arise. First what about the actual mortgage liability, can you afford to keep up the payments and second, where is ongoing income going to come from? State disability benefits currently average about £270 per month with the possibility of additional income, depending on the severity of disability, on a means-tested basis. Mortgages set up in recent years do not qualify for state help for at least nine months and even then it is fairly limited.
After discussing various options with Ms T, she felt that she needed two plans offering different types of benefit. These were a lump sum to pay off the mortgage and leave her some cash in the bank if she were diagnosed with a serious illness and income protection in the event of long-term disability.
For the lump sum, we arranged a critical illness plan. These will typically pay out on diagnosis of around 20 different diseases and most will include the big three of cancer, heart attack and stroke. Care was needed over the insurance company's definitions of what they regard as constituting a particular illness. For a lump sum of £105,000, Ms T, a 32-year-old non smoker, is paying Pegasus Assurance £19.80 per month.
After paying off the mortgage, she will still have around £25,000 as an emergency fund. Although this may sound good, it is barely one year's salary and what if she is still off work after 12 months?
The second plan that Ms T needed to provide long- term income was permanent health insurance (PHI). PHI provides an ongoing income throughout disability. Usually income will be paid until an agreed age, such as retirement or return to work.
Benefits are salary related, so you cannot insure yourself for as much as you like as insurers don't like the idea of you being better off not working. The better schemes will provide up to 60% of salary with no deduction for any state benefits you are receiving. Ms T's plan, with Norwich Union costs £38.87 per month.
Overall, Ms T has restored much of the financial security she previously enjoyed and protected her investment in a new home.
Keith Jarman is director of Hughes Carne IFA
Joined as head of strategy, multi asset, in June
Group income protection
Nine in 10 do not have income protection
Set to become part of Single Financial Guidance Body