Robert and his wife Caroline are both 34. Robert is a construction worker and Caroline is a primary school teacher. In their spare time, they both enjoy paragliding. They have recently bought their first house and have a repayment mortgage of £125,000 on a 25-year term. They are considering taking out cover to ensure their house is protected if they should fall ill and become unable to work. They prefer to obtain long-term cover, but their budget is limited. What options are available to them?
Jason King, Life Policies Direct
Robert and Caroline are right to consider long-term income protection (IP) because the cover is more comprehensive and, in some cases, more affordable than short-term cover. Estimated mortgage repayments and associated insurance costs come to about £800 a month, and to keep costs down we would split the cover between them. Assuming Robert does not work at heights of more than 50ft he would generally be placed in occupation class four, whereas Caroline would be in class three.
Paragliding presents a problem to some providers who would look to exclude this. Life Policies Direct, however, can source cover for this at standard rates, especially if they are members of the British Hang Gliding and Paragliding Association (BHPA).
To keep the premiums to an affordable level and get an 'own occupation' definition of disability, they should consider an element of self-insurance by keeping the equivalent of six months' net income in a savings account as a safety net. We will also dovetail their cover with any benefits payable through their employers. As Caroline is a teacher it is reasonable to assume she would get at least six months' sick pay from her employer.
Life Policies Direct would recommend £400 a month level benefit on a six-month waiting period to age 60. UnumProvident would offer the best terms with no exclusions for both parties. Assuming they are non-smokers, Robert's monthly premium would be £14.94, Caroline's £20.19, on a five-year reviewable basis. This compares with less comprehensive, short-term accident and sickness cover costing from £20 a month.
Ian Jefferies, Friends Provident
The following solutions are available for this young couple. The first is to take out an individual IP policy on each of their lives to cover the monthly mortgage payment.
Assuming Robert, who is a construction worker, is a non-smoker, and also assuming he is a member of the BHGPA, he would pay £43.62 a month for IP with a sum insured of £1,000 a month, a deferred period of 13 weeks and a ceasing age of 59.
If we assume Caroline, who is a primary school teacher, is also a non-smoker and a member of the BHPA, she would pay £41.11 a month for a sum insured of £1,000 a month, a deferred period of 26 weeks and a ceasing age of 55. Caroline's ceasing age would be restricted to 55 due to her occupation.
The second option available to them is to take out a joint-life, first-death decreasing term assurance with life and accelerated critical illness (CI) cover. Using the same assumptions, they would pay £64.98 a month for a sum assured of £125,000 and a term of 25 years.
Robert and Caroline would be able to repay the mortgage in full if they met the criteria for one of the listed CI, or in the event of either of their deaths. However, the circumstances in which the CI benefit would pay out is much more limited than the IP policy, which would cover any illness or disability if the condition lasted longer than the deferred period.
Stephen Clowes, Millennium Insurance Brokers
Some mortgage payment protection insurance (MPPI) policies allow only current mortgage payments and up to 25% extra for household expenses. Robert and Caroline could be badly underinsured if they do not protect against their full mortgage payment commitments and other household costs after any fixed period
I would offer MPPI on 'back to day one' benefit after a 30-day waiting period, which provides additional benefits such as a free practical back-to-work assistance service. This policy could be put into force quickly while any additional underwriting takes place for longer term income and life protection.
To cover mortgage repayments and other household costs of, say, £1,000 a month for disability and involuntary unemployment would cost £48.34 a month with Millennium Insurance. The cover would continue for as long as Robert and Caroline paid the premiums, had a UK mortgage and were under the age of 65. Benefits would be payable for up to 12 months for any one claim. There is no loading for occupation, age, sex, smoking or the additional leisure activities. Cover can be amended at a future date and is portable if the mortgage changes.
I would also recommend 52-week deferred IP for possible longer term disability, which could start from month 13, up to their normal retirement dates. An IP product for a manual builder for £1,250 a month (13 week deferred) by Norwich Union would cost £111.50 monthly (reviewable) before any loading for paragliding.
For people on a restricted budget, manual occupations and participating in higher risk activities as described, I would recommend they first consider a simple MPPI, to at least ensure some protection is in place, plus term life. I would then plan further discussions with Robert and Caroline as their budget and their family circumstances allowed.
