Life assurance is reasonably well understood as a type of cover that pays a fixed amount to a family if the insured person dies.
When buying a property, it’s always recommended that you take out this kind of cover – especially if you are becoming a homeowner with a partner and young family – to ensure that your mortgage payments can still be made in the event that you or your partner dies before the mortgage is fully paid off.
The reasoning behind taking out cover is simple. It’s likely that the joint income of both partners is required to support the property and, with one income gone, the remaining partner might face having to sell their home at possibly the worst time in their lives. But with life assurance, you are covered – literally.
Quite often, life assurance is not just about receiving money. It can also offer respite during an incredibly tough time.
Critical illness cover works similarly. If you develop a serious illness and you have this kind of protection, funds are available that can help you cope with life-changing events.
Thinking about protection
Promoting protection to my clients is a very strange experience. Humans are by nature very averse to thinking about their own demise. Whilst many of us know someone who has passed before their time, or who has experienced cancer, we don’t always think it will happen to us.
As a broker, it’s my responsibility to ensure that I have these tough conversations with my clients around life assurance. Brokers also have to balance the fact that, whilst most clients tend to agree it’s wise to consider some level of protection, the cost is often prohibitive.
You might feel that it’s paying a lot of money for something you will either never see the benefit of, or that will be small comfort when fighting an illness like cancer.
One thing we strive to do at AALTO, however, is to recommend protection that is as affordable as possible. Our opinion is that we would rather see our clients have something, rather than nothing.
When suggesting cover, more often than not we’ll agree a budget that is sustainable for you, and then tailor the policy to give the best range of protection to comprehensively cover all of the above. This very much differs from client to client, for the price they know they can comfortably afford.
One of the ways we can do this is by leveraging a policy that perhaps isn’t as well known as others: Family Income Benefit.
The low-down on Family Income Benefit
Typically, life cover works by having a fixed sum, or a sum that adjusts downwards as the mortgage balance reduces.
In regards to the latter, a mortgage that starts at £100,000 might only be £70,000 after 10 years. In other words, with each month that passes, the potential payout from the insurer also decreases, and so they offer this for a lower price.
Family income benefit works in a similar way, but the cover is designed around the age of the children in the household. Additionally, whilst life cover only pays out a single lump sum, family income benefit pays a monthly amount and is designed to provide both the quality of life and the insured ongoing income would have otherwise been provided.
For instance, assuming a child will cease to be classed as a dependant at age 21, if the cover is taken out when a child is aged ten, the insurer can estimate that they will have at most 11 years of payouts for family income benefit cover, and that this will decrease as each month goes by.
As a result, the premiums can be extremely good value for money.
We all know we can make concessions in life if we fall on hard times, but very few of us would like to think about having to make that decision on behalf of our children. We still want them to eat well, learn to play instruments, play sports, visit interesting places and have great holidays as well as to buy a car, go to university, get married and have a deposit for a house. Family income benefit can help you to deliver on those plans.
We recommend that family income benefit cover is taken in conjunction with a policy that clears the mortgage. This is based on the highest earner in the household, and considers what the household budget looks like before – with a mortgage payment and both incomes and outgoings – and after, without the mortgage payment, but including anything extra that might be required, such as childcare, and taking into account the lower of the two incomes.
This way we can fill the gap each month between the before and after the family income benefit payment is needed, and ensuring that household income remains stable through to the children’s 21st birthdays.
How it could work for you
Let’s look at a quick example. Mark and Sarah earn £30,000 each and have a mortgage of £1,000 a month. They are healthy, non-smokers and are both 35. They both bring home £2,000 a month after tax under the current 2019/20 HMRC rules. They have two children, aged two and five. They have a disposable income of £3,000.
Assuming the mortgage is fully repaid, their remaining disposable income would be £2,000. However, childcare for the youngest child is around £1,100 a month, leaving a disposable income of £900 a month. The difference of £3,100 over the year is £37,200.
With family income benefit cover, if something was to happen to one of them, they could be confident that their household income would remain as it is now.
And the cost for this cover? Just £17 a month. To put this into perspective, insuring an iPhone X costs around the same amount…
Of course this is a hypothetical family, and every client’s circumstances will be different. But by being very specific about what we are trying to protect, we can ensure we get the cover that’s right for you without leaving you worrying about your ability to maintain the cover.
I asked Sam Horner, a client and father who took the cover on a recent house move, why this worked for them and his response was: “It gave me peace of mind that my wife and daughter, no matter what happened to me, were going to be all right. I wanted to know that they didn’t have to worry about anything.”
When asked about the choice of this policy over a larger lump sum life assurance policy, Sam responded: “It was more tangible. By thinking about my daughter and the cost of the household, I could see that I wasn’t just picking numbers out of thin air. I know what I’m getting and what I’m paying for and that made it easy to justify each month.”
So if you share Sam’s ethos, but assumed that the cost would be prohibitive, get in touch. Protection is important, and it can be expensive, but we have the knowledge, experience and tools to get the right cover for any budget. Call us now on 0207 183 9447 or email email@example.com for a chat.