As expected, the media has been full of details of the recent Royal Wedding of Prince Harry to American actress Meghan Markle on the 19th of May. It is easy to get caught up in the excitement of a wedding, preparations for the big day ahead but what happens next? None of us know what lies ahead or what obstacles may throw us all off the path of our road to happiness.
Like all soon to be married couples, the last thing Harry and Meghan are likely to be thinking about are the ‘what ifs”. What if our health lets us down or the worst happens, and to be fair, those in such a privileged position are more than likely to have a team of advisers to make sure all this in place. However, as for the rest of us, when is the right time to think about this?
What comes along with marriage is more responsibilities and the need of comfort knowing that each other is looked after financially should there be any bumps in our road.
Here we will look at considerations for newly married couples now and in the future in protecting themselves financially.
It is rumoured that after the wedding Harry and Meghan will move into Nottingham Cottage at Kensington Palace. For those of us not living in the royal fairy-tale life, once the honeymoon is over many couples will start thinking about purchasing a home, if they do not have one already. When a home is purchased using a Mortgage, protection is required to repay the loan should you die during the term.
Mortgage Protection is a decreasing term assurance policy where the amount of cover reduces in line with your mortgage over the loan term.
The amount of cover required is the mortgage balance at the outset or the amount remaining at the time you would like to put cover in place.
You may be allowed to increase cover should you move home and increase the balance of your mortgage, alternatively a new policy could be taken out for the difference or for the full amount. Term Assurance
I’m sure not far from Harry’s mind on his wedding day will be his Mother Princess Diana, he knows from first hand just how short life can be and that tragedy can strike when you least expect it. From his own experiences he will want to make sure that Meghan is taken care of should anything happen to him. According to recent statistics from Children’s Bereavement Network a staggering 78% of under 16 year olds have lost a family member or friends.
Term assurance can provide a lump sum benefit on death. The benefit can be level or increase each year over the term until it expires, which is normally around retirement age. Its is also possible to take out policies on a life of another basis where the party to receive the benefits takes out the cover on their spouse’s life.
The question is how much is needed as a cash lump sum on death? The answer can be broken down into 2 parts:
- Immediate obligations for example – funeral costs, other debts, children, (this can include or exclude mortgage, university costs, estate settling costs etc)
- Future Income to sustain household – this is the present income of your family home that will be required upon death. It’s important to consider if someone is home looking after children that more income may be required to cover childcare cost.
Harry has helped with many charities over the years and I’m sure when Meghan starts her royal duties she will also be touched with stories of people who have been diagnosed with a critical illness. Many of us know someone who has suffered from a serious illness, McMillian Cancer Research documented that in 2015 2.5million people were living with cancer.
Critical illness can offer a degree of financial security and will pay a lump sum if you are diagnosed with a defined critical illness. Like term assurance the benefit can be level or increasing. The cover can be stand-alone plan or be an additional benefit on Mortgage Protection or Term Assurance. The term can coincide with retirement age, children grown up or your mortgage coming to an end.
The sum assured is calculated similar to term assurance - What financial commitments are in place and what future income is required to sustain the household over a specified period?
Although the Royal newlyweds will not have to worry too much about protecting their income, in the real world, this is all something we need to consider. How would you cope day to day if you or your partner were unable to work due to sickness or an injury?
Income protection can provide a benefit to replace any loss of earnings to help everyday living expenses if you were unable to work due to sickness or injury. The benefit can be level or increase each year. Costs are based on four Occupation Classes and there is the option of cover being set up on own or suited occupation activities of daily living bases.
To calculate, the benefit can be 60% of gross annual salary up to £60,000 and 50% of any above this amount.
Once a claim is made there is a deferral period from 4, 13, 26 or 52 weeks before the income starts, once you return to work the cover will restart.
Family Income Protection
Harry and Meghan don’t have family at the moment, but they might be feeling broody with the recent arrival of their new Nephew Prince Louis.
Unlike term protection Family Income Protection provides a benefit for a family and their young children that is paid yearly from death until the term of the policy ends. It’s possible for the benefit to be paid on a level or increasing basis.
The term is normally in line with the expectation of when the children will become financially independent.
To calculate the benefit required you will need to include all current expenditure and expected future spending, for example school or university fees should be taken into account.
Most newly wedded couples will start to think about the future and what it holds but they also need to consider how to look after each other if the worst should ever happen.
There are many other types of protection to consider but they are all dependent on the individual situation. The costs involved with all protection are all dependent on your personal circumstances and are all underwritten before the plan is put in place. Some pre-existing conditions could be excluded or make your cover more expensive. Most plans can be based on a joint of single life basis. other options include guaranteed rates meaning that the premium stays the same throughout the term, and waiver of premium where the costs will be paid if you are unable to work due to illness.
For some of us our 20s and 30s can be considered very much a ‘live for the moment’ time of life and we don’t want to think about the inevitable, but can we really afford not to?
Isla Leask is a Paraplanner at Acumen Financial Planning