Self-Employed Income Protection with Diabetes
Ravi, 38, is a self-employed architect with profit of £72,000. His wife Meera, 36, earns £45,000 as an employee with group life cover of three times salary and group income protection with a 26-week deferred period. They have two children aged five and two and a £310,000 repayment mortgage with 27 years left. Ravi has a decreasing term assurance policy of £150,000 written in trust, taken out when they bought the house, and no income protection or critical illness cover. He has £18,000 in savings. He was diagnosed with well-controlled Type 1 diabetes 12 years ago. An insurer has offered income protection with a 13-week deferred period, a five-year benefit term, an exclusion for diabetes-related complications and a 25% loading. Ravi thinks the policy is 'too expensive' and wants to rely on savings and Meera's income. He also wants to increase the mortgage by £60,000 to fund an extension.
1. Quantify Ravi's income protection need and evaluate the insurer's offer.
Read the worked answer
Ravi's income is £72,000. Income protection typically replaces 60–70% of income, so a benefit of £3,600–£4,200 a month gross is the maximum area. Because personally owned IP benefits are tax-free, a £2,500–£3,000 monthly benefit would replace a large part of his net income. The mortgage is £310,000; at 5% over 27 years the payment is about £1,700 a month. Meera's net income is roughly £2,900 a month, and her group IP has a 26-week deferred period. Ravi's £18,000 savings cover about six months of essential spending if the mortgage and bills are £3,000 a month.
The offer has three problems. The five-year benefit term is too short: the children are five and two, and the mortgage has 27 years to run. A term to age 60 or at least 10–15 years is more appropriate. The exclusion for diabetes-related complications is material and should be checked carefully; it may exclude the very event that causes a long claim. The 25% loading is acceptable if the definition is own-occupation and the benefit term is long enough. A 13-week deferred period is reasonable given savings, but a 26-week deferral would reduce the premium and align with Meera's group cover. Ravi should not rely on savings alone: £18,000 is not an income replacement plan.
2. Prioritise Ravi and Meera's protection gaps and recommend a sequence of cover.
Read the worked answer
Priority 1: Ravi's income. His self-employed income is the household's main vulnerability. Own-occupation IP with a 26-week deferred period, a benefit of about £2,500 a month, indexation, waiver of premium and a term to at least 60 should be put in place. The diabetes exclusion and loading should be disclosed and understood. If the insurer will not offer own-occupation cover, a combined IP/CI policy may be considered, but the definitions matter more than the price.
Priority 2: Life cover. Existing cover is £150,000 decreasing term in trust. Meera's group life is three times £45,000 = £135,000. Total death cover is £285,000 against a £310,000 mortgage, before the proposed £60,000 extension. Ravi should add level term cover of about £200,000–£250,000 to age 65, written in trust, to cover the mortgage and family support. Decreasing term alone is not enough if the aim is to clear debt and provide capital.
Priority 3: Critical illness and Meera. Standalone CI for Ravi may be loaded or excluded for diabetes, but it is still worth quoting. Meera's group cover is not portable, so personal IP or life cover should be considered. The emergency fund should rise to at least £21,000. Sequence the advice: IP first, then life cover, then CI, then emergency fund. Do not increase the mortgage until the protection is in force.
3. How should the proposed £60,000 mortgage increase affect the protection review and existing policy?
Read the worked answer
Increasing the mortgage to £370,000 raises the monthly payment by roughly £350 at 5% over 27 years. That is an affordability stress before the extension is built, and it increases the protection need. The existing £150,000 decreasing term policy will reduce over time and was sized for the original mortgage; it should not be cancelled. A new level term policy of about £250,000 to age 65, written in trust, would cover the larger mortgage and provide family support. Meera's group life helps, but it is not portable and may not continue if she changes job.
The lender will require buildings insurance, not life cover, but the adviser should insist that protection is in place before the further advance completes. Ravi's diabetes will be underwritten again; a new policy may be loaded or excluded, so applying early is sensible. The existing policy's trust and beneficiary wording should be checked. If the extension is for a home office, Ravi should not assume it increases his income protection need, but it does increase the mortgage. The advice should compare a further advance with a remortgage and check early repayment charges. Finally, the £18,000 savings should not be used for the extension; it is the income-protection buffer.