Michael, 37, and his wife Rachel, 33, have been having marital problems and have now separated. Neither can afford to stay in their house, which they bought with a joint repayment mortgage of £280,000 over a 25-year term, so they have to sell it. They hope the sell will give them enough money to buy two small flats fairly close to each other so they can both continue to look after their twin daughters, aged four. Michael, a civil engineer, earns £50,000 a year, while Rachel earns £42,000 working as a junior doctor. They are all healthy and currently have joint decreasing life cover for the mortgage only. What do they need to consider in terms of protection?
Alan Lakey, Highclere Financial ServicesWhether they divorce or not, now is the time to take stock of their financial situation. They need to consider the overall impact on their finances should either of them die or be long-term sick.
As a doctor, Rachel will be only too aware of the problems associated with long-term sickness or critical illness and she and Michael need to assess what benefits, if any, they receive when long-term sick and also in respect of ill-health early retirement. If Rachel is a practicing GP she is likely to have a locum agreement in place and this can be funded by an income protection plan.
Arguably, they no longer need life assurance to cover any outstanding mortgage but they should each seriously consider critical illness (CI) plans. Due to competitive pricing it is likely that such a plan will automatically include life cover. Any such plan should be sufficient to repay all debts and provide a worthwhile emergency cash sum.
They should also consider family income plans, which can be written in trust for the twins providing for lost income if Michael or Rachel died. The plans should be for 17 years to allow for higher education financial dependency.
Ideally, the plans should include CI cover, which would mean use of a split trust arrangement. Wills should be redrafted to ensure that the issue of guardianship of the twins is dealt with and specific reference to the family income plans should be made.
Steve Casey, Bupa Individual ProtectionIt is a shame that this sort of situation is all too common nowadays. The first things the couple need to protect are their mortgages on the new properties. Under their existing decreasing term assurance policy there may be an option to split the policy into two new single life plans. However, given their relative young ages and that term assurance premiums have fallen by over 30% since they took the policy out, then it may well pay to shop around. Assuming they have some equity in the existing home, and both would each be looking for £150,000, then for 25 years, this would cost Michael £20.15 a month and Rachel £13.23 a month for level cover. Depending on their circumstances, a term assurance with tax relief product may be appropriate, costing Michael £17.95 a month and Rachel £11.65 a month net of basic rate tax.
Assuming that Rachel gains custody and Michael pays maintenance, then this needs to be protected in the event of Michael falling ill and being unable to work. A £1,000 a month maintenance cover for 18 years with a three-month deferred period would cost £22.87 a month. This would of course work the other way if Michael gained custody.
Finally, a family protection plan that pays in the event of death or critical illness until the children are financially independent would also be appropriate. For a lump sum of £200,000 over 18 years, the cost on a guaranteed basis would be £81.72 a month for Michael and £50.44 a month for Rachel. This could be reduced if a family income benefit style policy was taken paying an annual benefit rather than a lump sum.
Mark Davies, Royal Liver
Michael and Rachel are likely to need mortgages for the two flats and also have responsibility for their children.
They could examine the flexibility of their current protection to see whether it has a 'separation' option that would allow them to take out two single life covers, without underwriting, replacing the joint life cover.
This could be compared with the alternative of either two new single life policies. Post A-Day, almost everybody is eligible for a pension term assurance (PTA). Two single decreasing PTA policies may well be an attractive option, especially if they have any higher rate tax liability as the premiums will get tax relief at their marginal rate.
Both Michael and Rachel should look at protecting themselves from a fall in income if they were unable to work due to long-term incapacity.
Cover could be provided with a number of deferred periods to dovetail with any cover provided with work. This can provide replacement income that increases as work based cover decreases.
In terms of additional cover to protect their children, they could consider family income benefit with a 14-year term. This would provide a guaranteed income on death of the parent until their children are 18. An escalating option could be chosen to ensure that the payments would be protected from inflation. A family income cover for Michael of £2,000 per month for 14 years would cost £16.44 a month from Royal Liver, £10.49 a month for Rachel.
Additionally, both Michael and Rachel could look at unemployment cover and critical illness cover to assist their finances if they were made unemployed or suffer from a specified critical illness.
These benefits could be provided within a menu based plan to help reduce costs by only having one policy fee.
