Should I consider income protection as an alternative to critical illness cover?

James and Helena

James and Helena have two children aged 8 and 6 and have a repayment mortgage of £300,000 over a 33-year term. Helena cares for the children primarily, and also works part time with a net income of £650/month. James is working full time with a net monthly income of £3100. The clients do not have any meaningful savings, having recently built an extension on their property to accommodate their growing family.

 

We discussed their committed outgoings, and they totalled £2800 with the cost of the mortgage representing £1100 of that cost.

This family had previously taken advice and were spending £185/month on two good quality life and critical illness policies fully covering their mortgage. Whilst they were certain that their household was fully protected, they came to me to sense check things and also see if they could make any saving on the cost.

 

The Shortfall

There were two things immediately apparent to me.

Firstly, if either parent passed away, whilst there was sufficient life cover to repay the mortgage, there was no additional capital to continue to run the household, replace the lost income of the deceased parent and to raise the children to financial independence. If, for example, James had passed away, whilst Helena would have been able to repay the mortgage, she would still have needed to find £1700/month to run the household. Even if she managed to continue to work, whilst caring for the children as a sole parent, she would have had a gap of £1050/month which with no savings would have been impossible.

 

Ultimately, the property here would need to be sold and downsized, moving a family with young children at a time where stability would be of paramount importance.

 

Along a similar line, if James were to be incapacitated with a chronic (long term) critical illness, their cover would pay the mortgage off, but they would be looking at a similar gap of over £20,000 a year of income shortfall to cover the cost of running the house and looking after the children.

 

Whilst these clients had received advice and were spending a meaningful sum every month to ensure that their property was protected and family looked after, there were clear gaps in their planning.

 

The Solution

Having spent some time with James and Helena together, it was clear that their over-riding priority was to ensure stability for their children if one of them were to pass away or be unable to work due to ill health. At a time of likely great emotional distress, ensuring that their children have the consistency of living in the same property and maintaining their same lifestyle was the most important thing to this couple.

 

We discussed stepping back from purely focussing upon their mortgage, and looking at some non-mortgage linked (level term) life policies and replacing their critical illness cover with a permanent income protection policy each.

 

Effectively by doing this I was able to ensure that if either client passed away, not only was the mortgage fully repaid but there was an additional £150,000 of capital to help raise the children and bring financial stability for an extended period of time.

 

By putting in place a permanent income protection plan for James and Helena they benefitted from the peace of mind that no matter how long they were to be unable to work, their current income levels would be maintained, and they would have sufficient monies to run the household and maintain the same living standards for their children. The increase in total coverage was marked, with James’s income protection covering a potential pay out of up to £900,000 as opposed to the £300,000 maximum claim level with his critical illness plan.

 

Not only were we able to ensure that this family’s financial plan is as robust as it could be, and close the gaps we identified, the monthly cost here reduced from £185/month to £145/month, saving £480 every year.

 

Barry Jones DipFA

Head of Financial Planning