James and his wife Monica, both 30, work together as interior designers. Monica is pregnant and they want to revisit their insurance. They currently have only a £120,000 joint life policy on their mortgage and nothing on their business together. Where do they start?
Ian Smart, Bright Grey
James and Monica are right to be concerned about the level of protection they have, especially as they have a child on the way. Assuming they have no health problems and Monica’s pregnancy is progressing normally cover should be easy to obtain.
Running their own business they should both make sure they have adequate income protection to provide them with an income if they become ill. Assuming they operate as a partnership rather than a limited company, they can simply take out own life policies and will typically be able to get cover based on a percentage of their share of the pre-tax profits of their business. This is particularly important for James if Monica is going to be taking some time off once the baby arrives, as he will effectively be the sole earner during that time.
They should also consider additional life or critical illness cover either as a lump sum or on a family income benefit basis as a way of reducing the cost if money is going to be tight once the baby arrives. This will provide them with a guaranteed level of income if one dies or suffers a critical illness, relieving some of the pressures of trying to run the business and look after their child. At the same time they could review their existing mortgage cover to see if a cheaper premium is now available and perhaps add some critical illness cover to this also, and by using a menu plan get the best value for all of the cover they need.
Matt Morris, LifeSearch
The policies they should buy depend on their budget as ideally they should both have their own Life Insurance, Critical Illness and Income Protection policies, but that can be expensive.
One question James and Monica need to ask themselves is who will care for the child when it is born?
Whoever is to become the main breadwinner at that point should look to take out a single life policy for 18-21 years to cover their child. Two family income benefit policies are a good option, one to cover the breadwinner and a smaller policy to ensure that whoever is caring for the child is also covered.
They should also think about writing all their life policies into a trust as well as indexing them to ensure the value isn’t eroded by inflation. A guaranteed insurability option should also be included so that they can increase their level of cover without underwriting in the future should they need to if they decide to have another child.
Income Protection is important as they are self-employed and, bearing in mind they are in low-risk jobs, an Own Occupation definition on the policy should be sought.
Ideally they should also look at critical illness policies too, just a simple policy that offers them a good level of cover and covers all bases. If they have the budget I would also suggest they look at splitting their existing joint life policy into two single policies.
Aiden Dewhurst, Progress from Royal Liver
Before going on to think about cover for their business, James and Monica need to review their personal financial protection to reflect a significant change in their personal circumstances. It is good that they have an existing policy, but with a baby on the way they might want to look at additional options.
At progress from Royal Liver our Family Income Cover (FIC) product is very popular with families as a competitive alternative to traditional Life Cover and would be a useful consideration for James and Monica. If they die it offers financial support to their dependents on an ongoing basis.
They should also think about how they would cope financially if they have a serious illness or accident. Tying a decreasing Critical Illness Cover (CIC) to their mortgage would help with their short-term financial issues. And at progress we offer a lump sum payment to members if their child suffers from any of the listed conditions.
To protect their finances on a more permanent basis, the couple might consider including an Income Protection (IP) option. This means a regular income if they were ever to suffer a serious illness or accident. Plus, if either of them decides to become a full-time house-person, it covers that too.
Finally, it would be worth wrapping all aspects of the cover up in a Flexible Trust – giving them additional peace of mind and the opportunity to add dependants at a later date.
