How much cover?

Daddogus · 28 August 2012 at 7:25PM

First time poster so apologies if I am posting in the wrong place.

My wife and I have just had our finances reviewed by an IFA (working on commissions). Whilst he has helped us get a lot of things sorted out we are wondering whether we are now spending too much.

Two caveats; I know that a lot of it comes down to personal choice and I know that by asking on a forum there is a risk of getting a multitude of different answers. However, I want to know if the following sounds reasonable or whether it causes sharp intakes of breath.

We are both in our late forties. We have a nine-year-old daughter. I work full-time and my wife works part-time and we rely on both incomes. I bring home £2,500 each month and my wife brings home £1,950. I know that should make us comfortable but we have not been financially astute in the past, being liberal with credit cards etc.

Our mortgage is £161,000 to which we pay £1,060 per month.

1) We both have Mortgage Decreasing Term Assurances with Critical Illness cover. Each of these will pay off the mortgage if either of us comes a cropper.

Mine costs £108.11 per month
Wife's cost £82.82 per month

2) We have Family Protection. Mine pays out £25,000 per annum and costs £29.93 per month. My wife's would pay out £2083.00 per month and costs £19.88 per month.

3) Lastly, I have Income Protection which pays out £29,927 and costs £70.46 per month.

I suppose there are two questions; Do we need this many policies/this much cover? If so, are we paying too much for it?

Thanks to anybody taking the time to respond. We'd be really interested to know what people's views are.

weighty1_2 · 28 August 2012 at 8:22PM

Hi Daddogus,

My personal view (and my professional one FWIW) is that income protection and life cover are "essentials" for anyone who wants to protect themselves and their loved ones in a comprehensive manner and that critical illness cover is a more luxury product, or more useful for repayment of mortgages that are interest only and therefore would not otherwise be repaid without a lump sum being available.

In regards to family protection I'm presuming the plans you have are Family Income Benefit plans? These are pretty much the best value for money plan for family protection and therefore without reducing the level of benefit or reducing the term it's unlikely you would be able to cut the cost of these.

Aside from the family protection I personally (very much stressing the "personally" part) would look at something similar to this:

1) joint mortgage protection death only - ultimately the mortgage can only be repaid once therefore for life insurance only there is no real benefit of having separate plans for mortgage protection
2) income protection for both you and your wife - based on the maximum amount of benefit you can take. For your wife you could consider having this only until the mortgage end date is this is before age 65 since the critical illness plan only covers you until this point anyway. Ultimately it is the loss of income that causes financially devastation. As long as you have a regular and guaranteed income coming in do you really need to have the mortgage repaid in full upon diagnosis of a critical illness?
3) Separate critical illness plans for you and your wife to provide additional funds over and above the income protection so that you have a financial buffer that comes with having cash in the bank. Cash provides financial flexibility, plus separate funds can come in useful should you need to make structural changes to your home, such as widening doorways or making bathrooms and kitchens more accessible. An amount which could be enough for such a purpose may be around £25,000 each.

I do think it's also important that whilst your IFA is working on commission it seems he has done a very thorough job in ensuring you and your family are safeguarded against long term/critical illness or death.

Take from this what you will, but it may be worth speaking to your IFA, or an alternative if you are slightly disillusioned with them and ask them to come up with a solution with a budget you are comfortable with. I nearly always ask my clients how much they want to pay on a monthly basis because exceeding what you are comfortable paying can easily result in cancelled plans which benefit neither the adviser nor the client.

I hope this helps.