What should I do with my finances (insurance/pension)?

[wiggy001]

I know this is a very open question, and everyone is different, but I'm after some general thoughts on insurance products, their relative merits and what others would do in my shoes. I realise there are no right and wrong answers here...

Situation: I am 37, wife is 36 and we have a 3 year ol daughterd. Just about to move into a house with a £280k mortgage over 18 years (hoping to reduce over time). I'm employed on a decent wage but with very little in the way of company benefits (eg no guaranteed sick pay), wife isn't working at the moment and plans to return to work after kids are at school (so 6-7 years if we have another). No major savings or pension at present.

I have a couple of old life/crit illness type policies which are not fit for purpose any more, so assume a blank canvas, what should be the priority?

I'm thinking:

- Life Insurance to cover outstanding mortgage, reducing with the amount outstanding - are these much of a muchness? I assume there's nothing to choose between them other than price?

- Critical illness (single payout) - again, as long as they cover all the major illnesses is there much to think about here?

- Critical Illness (income protection)- a financial advisor has been pushing the Vitality Serious Illness insurance - any thoughts? I don't really want a policy that only become cost-effective if you take the discounts and free cinema tickets, which seems like the deal here.

I've currently got mortgage protection in the event of redundancy which I will probably get rid of.

So, any thoughts on the above and any idea roughly what I would expect to pay on such policies? I know these are general questions but just want to get a feel for what I should be looking for to ensure the house is safe if I can't work and my family are catered for if I snuff it!

[rsbmw]

I recently sorted all this out, similar position though a little younger than you as we're 32 and 31 with a 3 year old and 225k left on the mortgage.

I went for 500k each life cover on single policies for me and the wife - put into trust to save IHT issues, cost was £36pm for me (recently quit ex smoker) and £19 for the wife. If you've had no major health issues it shouldn't be overly expensive, I arranged through Cavendish with L&G (other providers available etc)

Also picked up £2500pm income protection (until 65) for accident/illness from Holloway Friendly for £36pm, though this increases yearly in-line with their rate table. Would have been about £60pm for non-increasing premium, I worked out it would have been something like 14 years before the premium was cheaper on the the second policy, and 23 years before it would have been cheaper overall. Figured it wasn't worth it, as by then I would hope not to care so much about IP (grown up child etc).

Didn't bother with CI cover, frankly with good life cover, and income protection, I'm not sure the need for it - and it's expensive. My life policy will pay out if I'm diagnosed terminal with <6 months left anyway.

I think this setup works for me and is a decent level of protection for the family, for around £100pm so not overly expensive.

Sarnie on here does life/IP insurance products as well as mortgages so may be worth a chat with him.

ETA: worth looking at prospective insurer's payout rates etc, but other than that as far as I could tell price is the main differentiator.

Edited by rsbmw on Monday 22 August 20:30

[dalenorth]

Yes, I'd say your on the right lines but avoid vitality, it may appear a great product on the face of it but it lacks comprehensiveness on the big 4 claim areas, cancer, heart attack, stroke, and MS (the most important ones). AIG, friends life and LV are currently top rated for someone of your age.

Maybe also consider a family income benefit to last until the child is 21 to help the other family costs such as food, c tax, etc.

We've helped loads of pistonheaders with this over the years as we specialise in this area, so feel free to drop me a line for any help?

[rsbmw]

I've seen family income recommended, but struggle to see the benefit over a single large life insurance payout (assuming it covers the mortgage + a few 100k), maybe I'm missing something.

[dalenorth]

They both have there merits but FIB can be paid as a lump sum so it's wise to consider both side by side. Family income is designed to ensure the kids are looked after until dependency age primarily.

[wiggy001]

Thanks for the advice so far - we have a financial advisor coming back to us tomorrow with some options/numbers which I want to take away and review alongside the above posts. Will be interesting to see what he proposes as he seemed very keen to push Vitality...

[insurance_jon]

I'd listen to dale. He sorted mine out, and now does a number of our clients too

[Ginge R]

wiggy001 said:

Thanks for the advice so far - we have a financial advisor coming back to us tomorrow with some options/numbers which I want to take away and review alongside the above posts. Will be interesting to see what he proposes as he seemed very keen to push Vitality...

If you’re considering your protection options but are aware that you might have more children in the future, remember that it will have a huge impact on things. Various studies indicate having one child, over the course of 18 years, costs c. £12k each year. Two won’t cost twice as much, but you should factor it in now if it’s going to be likely.

As should the terms of your mortgage (long term fixed rate or tracker - if so, what are rates going to be like after you die in 6 years time?) and your promotion salary prospects. Don’t forget either, some folk have parents who are dependents. Most importantly, and often forgotten too, by blokes, what are you going to do if your wife dies, or worse (forgive me, but in financial terms) if she is alive but completely dependent on you? Once we’re dead, for us, the war is over. Survive though, and we still need to be fed and watered. If your wife is bedbound for whatever reason, your income stops too. It’s a double whammy.

Life assurance is not to provide a jaw dropping and unnecessary, unmanageable monetary amount in the event of your death (or vice versa) but instead to ensure the financial stability of surviving dependents in the long term. This is best achieved by calculating the likely ongoing financial commitments that your wife will have and reduce this amount by any known or anticipated state benefits and other existing provision, such as this policy.

It is my own *personal* view that the amount of cover you should have would be an amount that is capable of providing the required shortfall in the level of annual income for a surviving dependent based upon a leisurely investment return of only 2.75 - 3%. This ensures that the capital is not going to be exposed to needless risk although it requires a more pragmatic approach to how much money you might like/need in the event of death. It does mean too, that if/when it is needed then it is more likely to serve its intended purpose. Its demise as a fund should be linear, or as linear as possible, meaning that if it is written to cover the mortgage, there should (in principle) be nothing left in the fund the day after the mortgage finishes. Do some cash flow modelling or ask the adviser to do some reverse engineering.

Critical Illness Cover, ok - some people don’t like it and everyone’s circumstances are different. I like it – if you get it early enough when you don’t have a thick medical file, it can be really cheap. I don’t mind Vitality too much either – many of my clients are *really* into their physical fitness, they have great employee benefits and are young, so it’s quite a straightforward proposition. I like Aviva too, and Aegon (as a contract) but they suffer from appalling service support though (don’t they all?). Aviva is good especially, too, if you have history of heart disease in the family but the rest are catching up. Take a look at this too – Aviva, in return for some letched personal data, will give you a little free cover which may help if your child is three and/or if you intend to have any more. http://www.aviva.co.uk/life/free-parent-life-cover...

Similarly to life cover, CIC is not to provide a financial windfall for a survivor or any dependents but to ensure that any lifestyle change that is needed becomes affordable (to cover possible reduction of earnings, adaptation to home – cue Stanna Stairlift time etc - someone shoot me now) and any specialist equipment needed to ensure a good quality of life following the diagnosis of a critical illness. You might even want to go somewhere for medical treatment. The amount of critical illness cover that clients normally have in my experience, is more often driven by affordability rather than functionality or desirability, which should be the case. This is especially true if you leave it until your late twenties or early thirties.

It is my own view again, that the amount of critical illness cover held by a client should be an amount equal to five times the net annual salary/ income of the individual, intended to replace any lost savings or salary, resulting from any change in their work pattern/employment status resulting from caring for the financial dependent. That of course, is the ideal – for most people, an unrealistic, lofty and unattainable hope. Hence – get it sooner rather than later when you don't have nappies chipping into the monthly discretionary spend. You mention too, cover that you already have – it might be, contrary to what you imply, absolutely priceless.

This is why also, you should factor in any wage rises you are likely to be getting too. No point in having CIC to cover a salary of £35k if you have a stroke in fifteen years when you’re on an adjusted income of £70k. Drawn as an income stream, it can be cheaper too. Many people like the idea of an income and not a large sum to drawdown – that needs management and can be worrying – at a time in your life when you don’t want or need it to be.

For many clients, paying for suitable levels of CIC is an unrealistic target because the levels of cover would be too high to afford. But at least recognising it forms the basis of likely future needs. If you have to, ask the adviser about making annual increases above and beyond RPI, to compensate. Income Protection normally only allow up to 60% of your annual earnings to be insured against, so you have to be careful that you aren’t over insured, tax free though. However, if you believe that you are due a pay increase, don’t forget to constantly review it. If it’s too expensive, you can stretch the deferment period, but if you do that, make sure you have suitable emergency funds in place.

In a society where we pay £7 a month to insure a bloody mobile phone, life cover taken out early enough is outrageously good value by comparison. You sound like you’ve got it squared away, good stuff - and if you need a steer you have also got lots of good advice accessible via various advisers profile pages to tap into, too.

[Jockman]

I took out level term Life Assurance many years ago. If I pop my clogs I'm happy for my family to receive an amount that wipes out the mortgage twice over or so.

My LA also has Terminal clauses but for 12 months. I didn't realise they now align this to 6 months?