Over the last few posts, we’ve explored the various options for taking out an insurance policy, what’s right for you in your situation, and what you want to money to do or replace. But it’s still hard to get your head round, so here is a worked example to try to make things a bit easier to understand.
Consider, if you will, Sally and Steve. Sally is a medical sales rep earning £75k per year, of which £25,000 is performance related; Steve is a self-employed graphic designer earning £35k per year. They have a £280,000 repayment mortgage with 22 years left, and two car loans, totalling £30,000.
Their total monthly outgoings are about £4,000 per month before discretionary spending, and about £5,000 in total. Their total take-home pay is about £6,600 per month. Sally’s is £4,300 and Steve’s is £2,300. They have an emergency fund of £35,000 in the bank.
They have two adorable children, Ben and Bella, twins aged five, and they’re planning on having one more child. They sit down and consider the impact of one or both of them dying. They definitely want to have their mortgage paid off if they die, so they take out a decreasing term life insurance for the full amount of the mortgage to make sure that happens. They place the policy in trust.
Sally has death benefits at work of four times her basic salary of £50,000, so that’s £200,000 of life cover right there. They decide that this money should be ‘extra’ to their basic requirements, because Sally is being courted by another firm and she’s not sure what the benefits there will be, as it is a start-up.
They want to provide a cushion of a regular income if either of them were to die. As the main earner, the loss of Sally’s income would be more problematic, so they take out a Family Income Benefit on Sally’s life for £48,000 per year, which would provide £4,000 per month of income to Steve should Sally die.
They set the term on this policy for 25 years, which should see the hoped-for third child reach independence. As Steve’s income is less crucial, they take out an extra lump sum life insurance on Steve’s life, again for 25 years, for £250,000, or about ten years of his take-home pay.
Next, both take out income protection until their planned retirement age of 60. Steve opts for cover paying out after three months, as he’s self-employed. Sally opts for one year-deferred cover, as her employer will pay out for six months, and she believes that they could cope for a further six months by drawing down off their emergency fund. Finally, they take out a critical illness policy for £50,000, to complement the income protection insurance and provide a buffer for this eventuality.
In total, this costs them £225 per month (I made that figure up, by the way) which they reckon is money well spent, given their disposable income of £6,000 per month. It leaves them enough so that they can continue to save.
Your situation is unique, so I have two resources for you:
1. Speak to someone at LifeSearch, the UK’s leading online life protection advisers. Follow this link to a dedicated page on their site https://meaningfulmoney.tv/lifesearch and you’ll speak to their senior advisory team.
They will take you through your options and find out enough about your situation to make recommendations on policy types, levels, and terms. It’s an affiliate arrangement, so MeaningfulMoney will earn a cut of any commission due on any policy you take out, but it won’t cost you any more
2. I've created a calculator to help you think about types of insurance you might want to take out. You can then contact LifeSearch with this information, or you can do some comparison-site surfing to find the best terms for you. https://meaningfulmoney.tv/NA2
There is also a workbook you can go through, which should help you work out your costs, what insurances you need and how much you should spend on the various policies, dependent on your individual situation.