Protection structure for a young family with a tight budget
James is 41 and Priya is 39. They have two children aged 7 and 11. James earns £62,000 as an operations manager; Priya earns £18,000 part-time. Their repayment mortgage has £285,000 outstanding over 22 years. James has death in service cover of four times salary and no other protection. Priya has £40,000 of death in service cover. They have £12,000 in savings and no emergency fund beyond that. James wants the mortgage repaid and £2,000 a month for the family until the youngest child is 18 if he dies. He also wants cover if he cannot work through illness or injury. He is a non-smoker, has a BMI of 31 and takes medication for high blood pressure. Priya is a non-smoker with no medical history. They are unsure whether to use one policy or several, and whether to write cover in trust. They want to keep premiums affordable.
1. Recommend a protection structure to meet the mortgage and family income needs, giving reasons for the policy types, sums assured and terms.
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Start with the needs, not the products.
- Mortgage: a decreasing term assurance for £285,000 over 22 years matches a repayment mortgage. The sum assured falls roughly in line with the balance, so it is cheaper than level term for the same initial cover.
- Family income: family income benefit of £2,000 a month until the youngest child is 18 (about 11 years) is better than a single lump sum because it replaces regular income. If FIB is unavailable, a level term of about £264,000 could be used, but the family would have to invest it to produce income.
- Income protection: £2,000 a month, own-occupation definition, deferred period of 13 weeks because savings are small, waiver of premium and indexation. Check the insurer's income limit, usually around 60% of earnings, and offset any employer sick pay.
- Existing death in service: £248,000 is useful but not portable and stops if James changes job. It reduces the amount of personal cover needed, but do not rely on it for the mortgage.
- Structure: separate policies allow the mortgage cover to end when the mortgage is repaid and the family cover to end when the children are independent. Keep premiums affordable by prioritising the mortgage and income protection.
Recommend decreasing term, FIB and income protection; consider a small level term for final expenses.
2. Explain why the policies should be written in trust and how that affects a claim.
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Write the life policies in trust for three reasons.
- Speed: trust assets do not wait for probate. The trustees can pay the family quickly when cash is needed.
- Inheritance tax: if James dies, assets passing to Priya are usually spouse-exempt, but the trust keeps the policy out of his estate and avoids a later IHT problem if Priya dies. It also protects the children's benefit if Priya remarries or has creditors.
- Control: the trustees decide who receives the money, guided by an expression of wish. Children under 18 cannot give a valid receipt, so trustees can hold funds for them.
The mortgage policy is often assigned to the lender instead, so the lender receives the balance directly. Assignment and trust are alternatives; do not use both without checking. For the family income benefit, a trust is particularly important because the income should continue for the survivors. On claim, the trustees, not the personal representatives, deal with the insurer. The will does not control the policy.
3. How would the advice change if James disclosed Type 1 diabetes?
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If James discloses Type 1 diabetes, underwriting changes the plan.
- Life cover: insurers may offer standard terms, a premium loading, or exclude diabetes-related death. Poor control or complications may lead to decline. The decreasing term and FIB may be loaded separately.
- Income protection: this is harder. The insurer may exclude diabetes complications, impose a longer deferred period, or decline. Own-occupation cover may be unavailable.
- Critical illness: diabetes can lead to exclusion of heart attack, stroke and kidney failure, or decline.
Advise full disclosure, not non-disclosure. Obtain quotes from several insurers and consider increasing death in service through work, although it is not portable. Build the emergency fund. If income protection is declined, check whether Priya can increase her cover and whether James has sick pay. Review the mortgage term and sum assured to keep premiums affordable. The trust wording remains appropriate.