Practical Case Studies

Everyone's situation and need is different; in the examples that follow, three individuals' perception of their needs are followed by an outline of the kind of advice a good insurance adviser should offer in each case.

Case Study 1

The background. John King, aged 32, is a production engineer earning £17,500 a year. He and his wife Karen have three children aged 2, 4 and 5. The Kings have a decreasing term assurance covering their £18,000 mortgage. John is a member of his firm's pension scheme which includes a small amount of life cover; if he dies before retirement age, Karen will receive £125,000. She will also at present be eligible for a pension from the company of £1750 a year. They have no other life insurance.

John first considers the protection question. Karen would get a State pension of just over £12,000 if he were to die, and £1750 from his firm plus the £125,000 lump sum. How much more would she need? Well, they are used to a fairly comfortable style of life and what with the need for a car and all the children's expenses as they grow up they reckon it would be about £150 a week. But once the children had grown up it would be less and she would probably want to go back to work if she did not remarry. So at the most the income would be needed for 25 years. If they provide for this through an FIB policy, then it might also be sensible to have some extra term assurance cover, say £120,000, which if it wasn't needed for income could be invested for the children's future.

What about longer-term savings? John has just had a pay rise and the family finances aren't too bad at present. It would be a good idea to put a bit away each month. Who knows, Karen and he might want to take an extended break from work some day and go traipsing around Africa as they had promised themselves they would after they got married but never did . . . They could probably afford something like £120 a month. But what should they put it into? A good old with-profit policy as his father had always advocated? Or a unit-linked one? And over what sort of period? Say 20 years - that would make John 52 when the policy matured, which would seem about right.

The advice. At your age, Mr King, the protection policies are cheap and it is worth securing as much insurance as you may need now rather than later. The figures you have worked out on the Family Income Benefit policy sound right, though I would suggest you make the policy a joint life one so that the benefit would be payable on the death of either yourself or your wife. I would also suggest buying a policy which contains an option to increase the amount of benefit without medical evidence in future. The policy I have in mind would allow you to double the benefit at any point up to the fifteenth year of the 25-year term. You might want to do this if, for example, you had another child. Or inflation may continue at such a level that you need to increase it just to maintain the real value of the benefits. This option will add only a little to the cost.

As for the term assurance, we ought to think about this in connection with the longer-term saving plan, because this will produce some life cover in any case. Incidentally, I note from the details of your firm's pension scheme you've shown me that your wife is entitled to a pension at half the level that would be paid to you, and if you stay with your firm until you are aged 55 this could be substantial. The life cover under the scheme is half your salary, which will obviously increase with time. So I don't think you need to worry about protection for her after the FIB policy runs out.

Now you say you are not seriously considering private education for your children, but in choosing a savings policy I would suggest that you choose that one could, if you changed your mind, also be useful for this purpose. The unit-linked type is not really suitable, because the value fluctuates with the market and if you need to withdraw money to meet a commitment you need the security of a more stable value. The best way to achieve the flexibility you want here is, I think, the flexible endowment, because here you have guaranteed cash-in values from the tenth year onwards. So if you and your wife decide to take your trip earlier than you suggested, you will have a guaranteed sum available. Also, you can take the policy in the form of four £15-a-month units, each of which can be treated separately, so that you could cash one in while keeping the others in force. And the policy would also give you the option of taking out two further £125 pcm units without medical evidence if you wish to increase your savings.

Now the immediate guaranteed life cover on £120 a month would be £17,000, which is a useful sum but not perhaps all you need. But we can easily add an option on to the policy whereby the guaranteed death payment in the first 20 years is doubled, and the cost of this will be less than buying the term assurance separately. So you will have another £124,000 of cover on top of that provided by your firm's pension scheme, which I think is enough to meet the protection need.

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