Picture the scenario - Mr Jones, a 40-year-old client, suffers a massive heart attack. Fortunately ...
Picture the scenario - Mr Jones, a 40-year-old client, suffers a massive heart attack. Fortunately he survives, but the doctor recommends that he does not return to work, on the grounds that the stress associated with his job could kill him. Taking the doctor's advice, Mr Jones's income takes a huge drop. With 25 years left before he was due to retire, his early retirement pension is small and, with State benefits withering, the Jones' have to tighten their belts dramatically.
It is a bitter pill to swallow, but had Mr Jones died, the family would probably have been financially better off. The life insurance that was arranged when Mr Jones was 25 would have repaid the mortgage and the remainder used to clear other outstanding debts and to supplement the family's income.
This may be a fictional case, but it is far from inconceivable. It proves the point that clients' protection portfolios need regular reviews to ensure that, should the worst happen, there is a cushion to ease the financial strain associated with illness and death.
Young, free and single
For younger clients with no significant financial commitments, protection will not be top of the agenda. They may consider taking out a pension, but protection will not usually enter the equation until they buy a house. However, IFA Diane Saunders says that in the younger market, income protection must be the priority mortgage or no mortgage.
She says: "As soon as you have an income you must think about protecting it. Nobody should talk about a pension without mentioning income protection. For a twentysomething, what is scarier - growing old without a sufficient income or not having an income next month?"
The argument for protection becomes much stronger when a person gets on the property ladder. But while life assurance is often associated with home purchase, it will probably not be necessary unless the buyer has any dependents.
Roger Edwards, marketing manager, protection at Scottish Provident, says: "Critical illness will be the top priority at this stage. People move up the career ladder quickly, buying a house and a car along the way, but then on suffering an illness all that independence disappears and they are once again dependent on their parents."
Income protection can also play a similar role here in helping to maintain lifestyle by covering monthly outgoings, such as a mortgage repayment. David White, chief executive at Tunbridge Wells Equitable Friendly Society, sees the two as complementary benefits and, wherever possible, people should combine income protection and critical illness cover. In this way two risks are covered - disability and serious illness. It also means there may be the opportunity to make two claims.
"You can cover the mortgage with the critical illness benefit as well as live off the monthly income protection benefit," White says.
In an ideal world everyone would have both benefits, but where budgets are tight IFAs will have to recommend one over the other. Saunders says that for getting by on a day-to-day basis, income protection is the more relevant benefit.
She says: "If you end up needing an income for the next 20 years you would need an absolutely huge lump sum with critical illness, and with income protection benefits will be paid for whatever reason you are off work."
Kevin Pearce, protection marketing director at ZIFA, agrees but adds that without critical illness cover, protection is not comprehensive.
He says: "If a client has a heart attack they can be back to work after eight weeks and so would not have been able to claim under their income protection plan."
As with every financial services product, the decision over which products to buy will ultimately depend on personal circumstances. David Czerwinski, proposition manager, life, at Norwich Union, says that the protection chosen will always depend on what type of cover is provided by the employer.
For a self-employed person, income protection is essential as they have no company arrangements to back them up. Here day one income protection may be particularly appropriate as they are unlikely to be able to afford to wait a long deferred period before benefits kick in. Private medical insurance (PMI) may also be a priority for this group to avoid losing income while waiting for NHS treatment.
Fit and healthy twentysomethings may not feel the need to protect themselves from these types of risks until later in life. But there are advantages in buying young, according to Peter Telford, head of life assurance at Legal & General. He says: "The younger the person the cheaper the product is and the more likely they are to be in good health and get a quote at standard rates."
Gillian Gibbons, spokesperson at Standard Life Healthcare, adds that PMI is also best bought early.
"Anybody should consider buying PMI as soon as they can afford it and while they are still fit and healthy, so there is less chance of exclusions," she says.
Tying the knot
Once married, people will need to consider life cover, with many insurers recommending between 10-15 times earnings. While term cover looks cheap, Pearce recommends a whole of life contract.
He says: "Whole of life offers permanent protection and leaves the customer in control. Term, meanwhile, will only pay out for a restricted period, after which the customer may not be insurable. Also, the chances are that death will come later rather than earlier."
For a young couple wanting to protect their mortgage, separate life and critical illness cover may look expensive, but this cost can be contained by opting for life cover with an accelerated CI benefit.
Telford says: "Because there can only be one claim, this product can save the customer money. But if they want a financial breather after a critical illness, then standalone policies are more suitable because they get a payout and they still have their life cover in place."
Saunders adds that, at this stage, it is important to get protection in your own name rather than relying on a partner as it is not uncommon for marriages to break down after one partner has suffered a serious illness or disability.
"There are more examples of people walking out on a partner than there are of them becoming a devoted carer," she says.
2.4 children
When children enter the equation adequate protection becomes yet more important, and as both salaries and responsibilities increase, critical illness and income protection benefits may need to be upgraded. At this stage it is also necessary to take into account the role of the primary child carer.
According to White, the focus of insurance tends to be on the breadwinner, but if the carer is ill then nanny costs will need to be covered as the breadwinner will need to continue working. The main carer should ensure that their income protection policy allows for them to have a career break whereby cover is based on ability to perform household duties rather than occupation. On top of everything else this may seem costly, but White says the cost is competitive, particularly if arranged through a friendly society with a profit-sharing policy.
"A 30-year-old would probably have to pay £25 a month to insure enough to employ a nanny, but at age 50 they would get 40% of their premiums back," he says.
The need to protect the child carer has also been highlighted in Legal & General's Value of Mum survey which revealed that women spend an average of 67 hours a week running the household, a service that could cost almost £400 a week to buy in.
Once the children have left home and are earning it will again be necessary for IFAs to review a client's protection. With fewer years to retirement, the mortgage paid and no children to support, some people may consider reducing their cover. Edwards says that while responsibilities may have lessened, ambition may have increased, with many people making grand plans for their retirement years.
"With children gone and the mortgage now paid, clients at this stage will be looking forward to their retirement and planning trips such as cruises, but if they are ill they could end up using all their savings," he says.
Pearce adds that clients must think carefully before cutting back on protection. He says: "People may drop back on life cover once their children have grown up, but they must consider a surviving spouse as well as the effect of inflation on a lump sum and the level of income it can generate. A decade ago you could get 10% income on a lump sum, but now its closer to 5%-6%."
PMI at this stage may, however, have become too expensive. A 50-year-old couple on Standard Life Healthcare's Primecare, for example, would have to pay £138.32 a month.
Gibbons says there are a number of options for people wanting to cut the cost of PMI, for example higher excesses or alternative low cost plans. She adds that high excess plans with an insurance element to limit personal liability can be effective in reducing monthly outgoings.
"Many people at this age may have savings that they can put towards any necessary treatments," she says.
For example, using Choices, a couple aged 50 with a £5,000 excess would pay £29.20 or £43.38 with an excess of £2,500. But protection requirements do not stop here. Once clients reach later middle age, there will be a whole raft of new requirements to consider.
Rachel Williams is senior staff writer
