Protection for life stages: Young couples with children
12 July 2019
Andy and Sarah have two privately-schooled children and live off one income, but are convinced their protection needs are met through Andy’s employer. Are they right?
Young families typically have a number of responsibilities: a mortgage, children, and maybe spouses taking career breaks.
Meet Andy, an accountant and the only earner in his family at present, as his wife Sarah has taken a career break to bring up the couple's two children.
Andy is well paid, but the couple have a mortgage of £200,000 and both children are at private schools, so their outgoings are pretty high.
In terms of protection, Andy gets four times salary life cover through a group death in service scheme, whilst his employer will pay him full pay for three months and half pay for three months should he be unable to work.
What Andy and Sarah might say....
Though both Andy and Sarah are aware of the need for protection, they believe the £280,000 of death in service would see them through. Plus they simply don't believe anything will happen to them.
But the truth surrounding the most common types of conditions claimed for makes for sobering reading.
According to Cancer Research UK, almost 100 people are diagnosed with cancer every day, and almost half of those people will survive for at least 10 years. The cholesterol charity Heart UK says somebody in the UK suffers a heart attack every seven minutes. Meanwhile, the Stroke Association points out that every year in the UK, 100,000 people will have a stroke.
A possible solution....
When considering a solution for Andy and Sarah, the most important element is going to be income protection for Andy. He is the sole earner at present, and his income would stop completely after only six months of incapacity.
We may wish to look at an income protection policy for Andy, perhaps to age 60, with a split deferred period to dovetail with the full pay for three months and half pay for three months, which his employer will cover.
It may also be worth indexing the policy at, say, 3% per year to ensure the income benefit keeps pace with inflation, and any subsequent pay rises, without the need for further medical underwriting.
Secondly we will look at covering the mortgage and making sure that is paid off should either Andy or Sarah die or suffer from a critical illness.
A joint life first death with earlier critical illness policy, with a £200,000 sum assured over 16 years, might be considered for the couple. It could be a decreasing term policy with an interest rate of 4%, which means that as long as the interest rate payable on their mortgage does not average more than 4% over its term, the decreasing sum assured will always be sufficient to repay the debt.
If available, it would certainly be worth considering adding children's cover which would provide a lump sum should any of their children suffer from a critical illness. This is paid in addition to the main sum assured.
What if something happens to Sarah?
Finally we might want to consider some extra life cover for Sarah.
On Andy's death, with the mortgage being paid off and the death in service paying a lump sum of £280,000, Sarah should be well looked after. However, what if something happened to Sarah? How would Andy cope financially if he had to give up work, or work reduced hours, to look after the children? The mortgage would be paid off but there would be no additional life cover.
Maybe they could consider some additional life cover for Sarah. The extra cost for £200,000 worth of single life term insurance for a period of 16 years is typically less than £10 per month.
Whilst the likely total premium might seem like a high cost to Andy and Sarah, especially with only one earner and the kids at private school, the peace of mind all this cover would provide may very well be considered worthwhile for Andy, Sarah and the family.