Insurance Policies, Critical Illness / Income Protection

Mo87

HI Guys,

I am due to exchange on our 1st home this week along with my partner. I have been advised by my mortgage broker that I should look into some level of cover;

Life Insurance for mortgage value decreasing over the term
Income Protection
Critical Illness

I am the main earner (Circa £50,000 largely bonus based) and my partner (£21,000). We don't have many expenditures other than bills linked to our current rented property.

They have suggested £25,000 of critical cover each and £1000 of income protection per month deferred for 4 weeks and mortgage cover to the value of the amount borrowed decreasing over 25 years.

I have been directed to look at either; AIG or Royal London. I have been been through screening with both after the health questionnaire etc. and I am wondering which of the above would you see value in ?

So confused some help would be great :money:

Weighty1

Personally, I think £1,000/month of income protection is a fairly low level of cover for someone earning £50k, even if you have fairly low levels of expenditure. I'd say a higher level of critical illness cover would be preferable as well, however, this is all dependent on your thoughts. Did your broker come up with this arrangement based on the budget you are willing to spend on insurance?

Mo87

To give you an idea they have suggested £1000 of Income Protection deferred for 4 weeks, £165,000 of Mortgage linked Life Insurance decreasing over the 25 year term and individual cover of £25,000 of critical illness and this is coming in at £38.00 a month after screening.
Having never had this or given any thought to it, I don't know what is a sensible amount to spend, which elements I require and the value of each component as as you said do I need to up the claim values ?

Weighty1

Personally, I normally recommend my clients cover their full mortgage on death and then take as much income protection as their budget and the insurer limits allow. Most people's lifestyle is dictated by their income so maximising the income protection protects a clients lifestyle in the best way. Critical illness is a more contentious matter. Ideally, you would add this to the life insurance covering your mortgage, but if this pushes it beyond your budget then a smaller amount of cover, like £25k, would still be useful and would provide financial flexibility if you needed to adapt your home for wheelchair access, if for example one of you was diagnosed with MS, or paralysed. As long as it doesn't affect your standard of living I'd normally suggest taking as much cover as you reasonably can. I deal with a lot of clients with health problems which prevent them taking out income protection and critical illness cover and invariably these are the things people want when they've been seriously ill in the past.

Kynthia

You need to think about what each of you need should one of you die, get a serious illness or become too sick to work. Now tgink about what you'd already get should these things happen, such as does your employer give a death in service lump sum, does your pension pay out anything and to who, do you get paid when sick for more than 4 weeks, would you have enough in savings to pay for any large expenses should you get an illness/injury (e.g. adaptation to your home), could you survive on just your partners salary if you became to ill to work short term or long term, etc?

So now you have an idea of what you want/need and what you'd get. So do you want to pay for insurance for the difference? Can you afford the insurance? Are you willing to take the chance that you won't die before retirement, get a serious illness/injury or be too ill to work?

Then you need to consider whether you'd want these insurances in the future, or want them for higher amounts, when you may have a less generous employer, children who are financially dependant on you, a bigger mortgage, etc. If so then it may be better to get them now as in the future you'll be older and possibly have health issues so getting the insurance then will be more costly. Plus do you pay more now in order to have premiums that won't increase, or pay less but risk them becoming uncomfortably expensive when reviewed in the future?

Chris_Pollard

Agree almost entirely with Weighty1's comments, but I'm not quite as bullish on the level of Income Protection. At the absolute minimum you need to cover all essentials, bills, food, mortgage etc. If you fall ill such that you can't work, it is unlikely you will be spending as much money on leisure and lifestyle. As Kynthia suggests work out what sick pay your employer's will pay and for how long. In my opinion, all three types of cover will protect you against the perils of life so all have a place. The most important is to ensure the right flow of income in case of illness or disability - this is the most likely to occur. Then tailor your life cover and critical illness to your budget.

kingstreet

To establish the sensible level of IP benefit you could take, we take the budget planner used for our mortgage planning and add to it the monthly mortgage payment which will apply.

We then compare the monthly incomes of the borrowers and work out of that overall budget, how much is being contributed by each.

If the total is say, £3,000 and App 1 brings in £2,500 net and App 2 £1,000 net, we know that if App 1 is injured; they will need £2,000 to add to App 2's income to cover the overall budget.

Therefore App 1's IP should be for £2,000.

The other way round, if App 2 is disabled, App 1 will still have their £2,500 net, so the shortfall is only £500 to cover the overall £3,000 requirement.

Therefore App 2's IP should be for £500.

If both were unable to work due to illness/disability at the same time, the full £3,000 per month would ensure their quality of life can be maintained.

The benefit from Individual IP is also paid tax-free so no grossing-up is necessary.

There are other ways of doing it, but this is how we've grown comfortable adapting IP into the mortgage protection area.

Chris_Pollard

Kingstreet, that's appears a sensible approach. Out of interest what percentage replacement ratio does that typically create when comparing the annual benefit level with the income?

kingstreet

Sorry, Chris.

Never actually worked it out. Next time I do one, I'll make a note.