We were approached by a client who required support in finding the right mortgage solution. As standard practice, we advise our clients seek support and advice to ensure their lifestyle and mortgage are protected.
In this particular case, after successfully placing a mortgage for our client, she arranged a review of all of her existing policies, ensuring she had adequate cover in place for her new mortgage, taken out over a 23-year term.
As a self-employed sole trading Barrister and the sole fee earner for her family, it was imperative that she had the right cover in place, in the event of illness, injury or death.
Upon reviewing her existing cover, we established that she had four life insurance policies, one of which included critical illness cover:
Policy 1 | Decreasing life insurance or earlier critical illness cover for an old mortgage – this was worth circa £200,000 and was due to expire in 14 years. The issue with this policy was that, as the new mortgage term was 23 years, this would not provide adequate cover and there wasn’t an option to increase the term of sum assured to meet our client’s new requirements.
Policy 2 | Decreasing term life assurance – this policy provided cover for circa £60,500 and was due to expire in 17 years.
Policy 3 | Decreasing term life assurance – this policy had £4,500 left and was due to expire in one year.
Policy 4 | Family income benefit life assurance – this policy was worth £50,000 per year with six and a half years left till it was due to expire.
When combining all four policies, we established our client was spending approximately £250 per month on insurance – £265,000 of this was in lump sum life assurance (if she claimed the critical illness there would be just £65,000 in lump sum life insurance) and £50,000 per year in income life assurance.
Another key consideration was that our client was a smoker when these policies were taken out. However, as she had quit smoking approximately 18 months ago, her premiums would now reduce by 50%.
Problem with the client’s existing cover:
Life insurance | Our client had taken out a mortgage loan of £800,000 to be repaid over a 23-year term. If she continued with her existing cover, after 14 years, she would have minimal life insurance in place. This would leave her partner and family in a vulnerable position, in the event of her death. If she passed away now or within the next few years, her family would only be able to pay off a small share of the debt and service the mortgage for a few years using the family income benefit. However, in this scenario, the house would likely have to be sold immediately and the partner would be left having to find income to support the family and himself.
Critical illness cover | This aspect of the client’s existing policy would have provided sufficient cover; however, it was limited, as it would end at the age of 60 when she may still be active in her career. It was also set up as a decreasing policy, which meant that she could get to age 58, be diagnosed with a critical illness, and only be able to make a minimal claim, as the sum assured would have decreased by a considerable amount. In this instance, the client would still have mortgage commitments for many more years and, if the critical illness caused early retirement, her financial stability would be severely impacted.
Income protection | Our client was under the impression she had an income protection policy in place; however, she had mistaken this for a family income benefit, rather than protection. In our experience, this is a common mistake – typically a result of an adviser not ensuring the client understands the product and how it works.
Family income benefit | This pays out a tax-free monthly income for the remainder of the term – essentially, the benefit that our client has will decrease in value by £50,000 every year for six and a half years and then come to an end. These policies have their benefits and can be effective for providing your family with sufficient cover, should, in the instance you pass away before your children turn 18 or 21. However, as our client’s youngest child was almost 18 and not living at home, the excess premium could be better utilised towards a more suitable plan, fitting our client’s circumstances.
The cover we advised on:
When establishing the most suitable solution for a client, we look to understand their requirements. Our client advised her main requirements were as follows:
- In the event of her death, the full mortgage debt would be paid and placed in a trust for her partner and children
- Increasing life or earlier critical illness cover throughout her working life
- Income protection, to cover the sum of £7,500 monthly, until the age of 70, with a six-month deferred period
- A maximum budget of £300
We set up three policies for our client:
- Decreasing term assurance for a 23-year term, covering the mortgage debt of £800,000.
- Increasing life or earlier critical illness up to the age of 70, starting at £150,000 and increasing at 5% per annum. Additionally, she went from having a core policy covering around 30 conditions to 102 conditions, including additional payments and benefits.
- A short-term income protection policy to cover a monthly sum of £7,500, with a payment period of two years and unlimited claims up to the age of 70. With this policy, we did recommend income protection with an unlimited claim period; however, it was very expensive and would have well exceeded our client’s budget.
In total, the cost for this solution was £290 per month. The client was delighted that it was only going to cost her £40 more, to provide significantly more cover, which was adequate for protecting her family and lifestyle.
With all the new policies combined, in the event of illness, injury or death, our client wouldn’t have any shortfalls on her mortgage debt and had a far more comprehensive critical illness cover policy in place.
Please note: These plans have no cash in value at any time and will cease at the end of the term. If premiums are not maintained, then cover will lapse. These plans have no cash in value at any time and will cease at the end of the term. If premiums are not maintained, then cover will lapse.