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SPW: Back the family carer when it comes to protection

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Most customers understand the need for protection for the main earner. But providing for the family carer too often goes unrecognized.

In addition, while clients generally appreciate the need for protection to cover mortgage payments, they can overlook the risk of undergoing a life-changing critical illness and surviving.

How much should I insure for the kids?

Families with financially dependent children could benefit from a lump sum to draw on if either parent dies. A life insurance policy could potentially provide this. The sum doesn’t have to be large as the policy could be dovetailed with an income-producing family income insurance policy.

But advisers should try to ensure the beneficiaries have a certain amount of money for a certain number of years that matches inflation.

If something happens to the main carer then, unless the earner has wider family support, some childcare will likely be needed, which can be costly

Advisers can look at any possible income shortfall and use cashflow modeling to work out what the sum assured should be based on the potential circumstances.

Many clients believe life insurance would be needed just to help cover the income shortfall in the event that the main earner passed away. But this is too narrow a view.

Insurance plans for a carer

Consider a family in which one of the parents is working and the other is the main carer. Suppose they have two young children. If something happens to the main carer then, unless the earner has wider family support, some childcare will likely be needed, which can be costly.

So both parties could need life cover to ensure the survivors don’t go short and the earner wouldn’t perhaps need to give up part of their job and receive less income. This family would require protection for both the earner and the carer.

Don’t forget to insure joint debt

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Many homeowners have outstanding mortgages on their properties. And many mortgage holders use life insurance to cover this debt, so the family would know the mortgage could be paid off should the policyholder pass away.

Families with financially dependent children could benefit from a lump sum to draw on if either parent dies

A client with a repayment mortgage, in which the outstanding debt decreases over time, could take out decreasing term insurance to cover the debt. But a client with an interest-only mortgage could take out a policy in which the sum assured equaled the outstanding capital debt, covering the period until the mortgage was paid off.

Why critical-illness cover?

People can be woefully unprepared for having a critical illness, such as cancer, a stroke or a heart attack, but then surviving. In these circumstances, they often can’t go back to full-time work. And they may be saddled with a large mortgage and have to make expensive changes to their living accommodation.

Critical-illness insurance can pay a lump sum to policyholders that, if perhaps combined with income protection insurance, could help cover the mortgage and additional expenses. Failure to take out critical-illness insurance and income protection insurance could leave clients highly exposed to financial insecurity.

Both parties could need life cover to ensure the survivors don’t go short and the earner wouldn’t perhaps need to give up part of their job and receive less income

However, it is worth remembering protection policies have no cash-in value at any point. If you don’t pay your premiums on time, your cover will stop, your benefits will end and you’ll get nothing back. If the benefit amount has not been paid out by the end of the selected term, the policy will end and you’ll get nothing back.

People take out insurance to give them peace of mind that, if an awful event happens, they will have money as back-up. Unfortunately, clients are not always aware of their potential financial vulnerabilities. It is the job of the adviser to ensure they are fully informed.

Richard Allan is financial planning director at Schroders Personal Wealth





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