One of the common issues we find when we review a new client’s situation is that over the years they have been sold (or have purchased) many life, critical illness and income protection policies.
Now, it’s important of course to state that such cover for, say, a couple with a family and a mortgage, is absolutely vital. It is perhaps better to have ‘a little too much’ cover rather than a shortfall that would cause them serious problems if the worst was to happen.
However, it’s also fair to say that it’s likely that you would not be happy paying well over the odds for protection year after year if it turns out that you did not need it.
In many cases this turns out to be the case, particularly for clients age 45/50 plus. This is because in almost every example we can think of, several things happen that mean the protection held is questionable.
The top few would be:
the policy itself is not ‘best value’
the client was overinsured from the start
matters have not been reviewed for many years
NHS benefits have not been built in to the shortfall calculation
I think the first three are self evident, but let’s look at the fourth issue here. Perhaps it might be sensible to look at a couple of doctor Consultant examples. In both cases we presume that they are married with 2 children, and have a mortgage.
We look at life cover and income protection only here, and the figures we use are for illustrative purposes only.
Term Assurance (TA) - lump sum life cover over a certain number of years.
Family Income Benefit (FIB) – monthly income life cover over a certain number of years.
Permanent Health Cover (PHI) – monthly, tax free, income replacement usually to age 60.
In the examples below, you will see that the NHS provides these benefits automatically, depending on superannuable salary and length of service. If you have purchased added years then these will boost cover even further.
David aged 40
He has 16 years in the NHS with a current salary of £100k pa. The children are aged 8 and 10, and are likely to go to university. Debt is at its peak, and takes a large slice of the monthly budget.
David has been sold several life policies, and a PHI plan, costing £100 per month in total. When asked, David cannot remember being advised as to the NHS benefits he has already.
So what sort of NHS cover would David have? We only use here the expected minimum he would receive from the NHS if he was approved as long term incapacitated or indeed dies. This means using Tier 1 benefits for the calculation.
Lump Sum on death – £200,000
Income paid on death – £20,000 pa
Income paid for life on incapacity – £20,000 pa
These are fairly large sums of money, and once we understand what level of cover David really needs, sometimes savings can be made.
Tom aged 50
Tom has 26 years service in the NHS, with a current salary of £110,000 pa, as he has some discretionary points. The children aged 20 and 22 are close to leaving university, and the mortgage is a lot less now. His overall protection needs have not been reviewed for 5 years, and he is paying £140 pm for his protection policies.
Tom’s NHS benefits are:
Lump Sum on death – £220,000
Income paid on death – £35,750 pa
Income paid for life on incapacity – £35,750 pa
As you can see, these benefits are higher, but the most crucial issue here is that Tom’s protection needs are reducing. Yet as these policies were purchased many years ago, it is easy to miss that they become irrelevant to his requirements.
Results for GMPs OR GDPs are likely to be similar.
Of course, some policies may well have been designed to finish at this time, but some go on for many years. It is in this type of scenario where large savings can usually be made.
Whether you use a traditional financial adviser or a fee based planner(or you do it yourself) you need to do a shortfall calculation and include all existing cover, including NHS benefits.
Other tips are:
taking out life cover each rather than jointly does not cost much more, and ‘doubles’ your cover as a couple (it also means that the survivor would have their own cover in place)
if you are buying critical illness and life cover, then make sure you compare plans that combine both as they can be very cost effective
ensure any life cover is written in trust to help with Inheritance Tax Planning
if you have Wills, review them. If you do not have Wills then take action now
it makes sense to take out Lasting Powers of Attorney
Remember, every £1 saved on policies you dont need, can be spent on what you really do need.
It is vital that you know:
What you and your family will need if disaster strikes
what you currently have including NHS benefits. If you are unsure what your NHS benefits are, then write to them quoting your N.I. number and date of birth.
NHS Business Authority, Hesketh House, 200-220 Broadway, Fleetwood, Lancashire. FY7 8LG. Telephone 01253 774774.
By taking action now and you could save sizeable sums of money!