Allocating a £110 protection budget for a family with uneven sick pay
Aisha, 39, is a teacher earning £43,000; her occupational pension includes a death-in-service lump sum of three times salary and dependants' pensions. Her employer pays six months' full pay and six months' half pay before statutory sick pay. Tom, 41, earns £38,000 as a joiner, has death in service of three times salary and only four weeks' company sick pay. They have a £215,000 repayment mortgage over 24 years and children aged 6 and 9. Their savings are £9,000. They have £110 a month available for protection and want to 'cover the mortgage and keep the family afloat' if either dies or is long-term ill. Tom thinks income protection is unnecessary because 'the state will pay'. Aisha wants everything in her name because she has the better sick pay.
1. How should the £110 budget be prioritised, and why?
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Prioritise by probability and severity of loss, not by what is easiest to sell.
Long-term illness first. The chance of being off work for months through illness or injury before 65 is far higher than dying. Statutory sick pay is around £118 a week for up to 28 weeks and the welfare system is means-tested and slow. Tom has four weeks' company sick pay, so his household would fall to near-zero income very quickly; Aisha's sick pay falls to half pay after six months. Income protection for both should take the largest share of the budget.
Life cover second, sized against existing schemes. Tom has 3 × £38,000 = £114,000 death in service; Aisha has 3 × £43,000 = £129,000 plus dependants' pensions. That already covers much of a £215,000 mortgage, so the gap is smaller than it looks - but death in service is lost on leaving employment and does not replace childcare costs or lost earnings. A decreasing term assurance matching the repayment mortgage balance is cheaper than level cover for the same starting sum.
Family income benefit for the children's dependency years is cost-efficient per pound of cover, paying a monthly income rather than a lump sum.
Critical illness last. It is the most expensive per pound of cover and the least likely event; add it only if budget remains after the above. Aisha's idea of putting everything in her name should be corrected: joint or single policies should follow whose income is at risk, and both incomes are needed.
2. Explain how the income protection policies should be structured, particularly the deferred periods.
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Deferred period must line up with sick pay. A deferred period longer than the employer's cover leaves a gap; shorter is wasteful. Aisha has six months' full pay then six months' half pay, so a six-month deferred period bridges straight into cover, or a twelve-month deferred period if they can live on half pay - this is cheaper. Tom has four weeks' sick pay, so a four-week or eight-week deferred period is needed despite the higher premium, unless they build an emergency fund from their £9,000 savings.
Amount. Insurers typically cover 50–60% of gross income, paid tax-free where the policy is written on an individual basis; state benefits may be offset by some providers. Aisha's £43,000 supports roughly £1,800–£2,150 a month gross-equivalent cover; Tom's £38,000 a little less. Self-employed income is assessed on two to three years of accounts, so insurers will use his average net profit, not turnover.
Definition and term. Check whether cover is on an own-occupation or work-task basis - important for a joiner whose role is physical. Run cover to 65 or 67, consider index-linking the benefit and waiver of premium, and check the policy is not written so that it is conditional on the mortgage. Tom should be told plainly that the state does not replace income in this way.
3. What must the adviser disclose about remuneration, and why should the policies be written in trust?
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Disclosure. Protection products fall under the Insurance Distribution Directive regime. Before the contract is concluded the adviser must disclose the nature and basis of the remuneration - whether it is a fee, commission, or both - and must give the amount of commission on request. A personal recommendation requires a demands-and-needs statement explaining why the recommended policy is suitable. The adviser must also make clear that protection is not a condition of the mortgage; the mortgage can proceed without it, and the client should not feel coerced.
Trust. Writing life and critical illness policies under a suitable trust (often a split trust where critical illness cover is included, so the life element can be paid to beneficiaries while any CI payment stays with the policyholder) keeps the lump sum outside the estate for inheritance tax and, more practically, avoids probate delay. A mortgage protection payout is often needed within weeks to keep paying the mortgage; an untrusted policy can be frozen for months while probate is granted, forcing the survivor to borrow or sell.
Review. Record the client's health declarations, confirm the policy is on risk, and diarise a review for when the children leave education or the mortgage balance falls, so the cover is not left misaligned with need.