My client is 35, single and earns a significant wage. He has no protection at all. He rents an expensive property in south west London and has no living relatives. I am trying to advise him on why he needs protection. What types could be best for him and what are the arguments to say he should pay for cover?
Ben Heffer, insight analyst Life & Protection, Defaqto
First and foremost the client should protect his income. He has no dependants relying on him but also no one on whom to rely; if he were sick or disabled and could not work he would effectively become his own dependant. What contingencies does he have?
Consider arranging unemployment cover for the client. If he suffered redundancy, this would pay a monthly benefit for up to 12 months affording him a financial cushion while he looked for another job. A cost-effective solution is to write income protection with a 12-month deferred period and insure that with a short-term income protection policy. This could incorporate the unemployment cover.
Next consider critical illness cover. It is not a replacement for income protection but it could help to replace lifestyle over and above meeting day to day living costs.
The implication is that he enjoys an unrestrained lifestyle. Establish the things he values most: his swanky flat, eating out, pubs/clubs, cinema, smoking perhaps, gym membership, his flash car, hobbies, entertaining at home, nice clothes.
Ask him how he would feel if he had to give these up indefinitely. Find out how much he spends each month on these items and contrast it with the cost of essential protection cover.
Do not forget to include a private medical insurance recommendation. In the event of a health problem he could be diagnosed quickly and, if necessary, treated promptly helping him to maintain his earnings potential.
Owrang Rahmani, IFA, Quantum Advisers
As a high-income individual with no living relatives but high living costs, is it worth taking the risk that the standard of living is unsustainable should an unfortunate event occur?
The key question is what would this individual want to happen if they could not work? What contingencies does he have? Does he have emergency savings in case of an unforeseen event? Will his employer provide sick pay, and if so for how much and for how long?
There are a number of products available that can accommodate his needs, at varying costs and levels of cover. With most employers there is a level of sick pay that will cover short-term illnesses, perhaps three to six months. But any longer and his employer may not continue to pay.
The cheapest level of cover available is short-term income protection; this will protect accident or sickness, usually for a maximum of 12 to 24 months. It can also be deferred to kick in after a specified amount of time perhaps in line with sick pay. Cover would be available for up to 50% pre-sickness earnings. This type of cover can also protect against unemployment or redundancy.
He may want to consider longer term income protection to provide a more comprehensive level of cover, or critical illness cover to pay out a lump sum on diagnosis of a serious illness.
What is most suitable will almost always come down to what the client wants and their budget.
Mark Robertson, protection partner, Chadney Bulgin
The client needs to consider how he would support himself if he was unable to continue to earn his significant wage due to accident, sickness or unemployment.
Since he is single and has no living relatives to fall back on, he would quickly erode any savings, this is assuming he has some.
Many people believe the government will look after them if the worst happens but the stark reality is that it will not and many people would find it very difficult to survive on a dramatically reduced income should these events happen.
Employee benefits for if he fell ill should be established. If his employer does not provide him with cover, then he would move to Statuary Sick Pay and how would he then be able to pay the rent on his expensive property?
What would he do if he was diagnosed with a critical illness, which resulted in him being away from work for an extended period of time, or if he was unable to return to work in the same capacity?
He could consider covering his income against accident, sickness and unemployment by way of an ASU or income protection (IP) policy, which would provide him with longer term cover.
Critical illness could be considered, which would provide a lump sum on diagnosis of a specified list of illness, and could be used to assist with outgoings, a holiday to assist with recuperation, or changes to his rental property if he was totally and permanently disabled.
