Quantifying the amount of cover required is not an exact science; however, a structured approach to assessing the needs of the client is more likely to provide a better result than a “one size suits all” approach.
It is also important to distinguish between the different needs and requirements in the event of:
Death
Illness or disability
Unemployment
Quantifying life cover
The following process can help to quantify the amount of cover required on death:
Step 1 - Calculate short term capital needs
Step 2 - Calculate long term income needs
Step 3 - Calculate short term income needs
Step 4 - Deduct any existing cover and establish any shortfall/surplus and calculate the sums assured required
Short-term capital needs
These are the capital amounts that would be required immediately following death and could include:
Funeral costs, which average around £4,000
Emergency funds - bank accounts and other assets may be frozen pending probate, so an amount of money may be required to meet day-to-day expenses until the estate is released
Debts and mortgages may become payable immediately on death
Any outstanding tax and taxes incurred on death, which could include self assessment income and capital gains tax as well as any IHT due on the estate
Any specific bequests made in the will outside of the immediate family will reduce the amount of capital available. This could be a bequest to charity or business assets left as part of a shareholder/partnership agreement
Long-term income needs
This is the cost of providing for the surviving spouse or civil partner and any long-term dependants, the costs of which are likely to last for their lifetime.
Examine the family’s current expenses
Deduct any expenses that would cease on death (e.g. mortgage payments)
Deduct the costs associated with any children
Alternatively, calculate the minimum expenditure needed
Having established a baseline, deduct from this amount any income that would continue to be paid such as spouse’s ...
Shortened demo course. See details at foot of page.
... number of claims, whereas CIC will payout on the first event and then cease
CIC pays out a lump sum where as IP pays out an income
IP is based on salary where CIC is not. Where salary is low IP benefits will be restricted; CIC benefits will not
CIC pays out on diagnosis of specific illnesses or conditions, where as IP pays out on the inability to work regardless of the illness or condition (apart from plan exclusions)
CIC lump sum could also be used to fund for retirement income. Where IP benefits are being paid, the ability to pay pension contributions is restricted to £3,600 per annum (unless client has waiver of premium in place). It is likely that employer contributions would cease and therefore retirement planning would be affected
Redundancy and unemployment
Clients should plan to have some emergency funds available in case they lose their job, though the most important financial planning exercise in these circumstances would be to reduce costs.
During periods of unemployment, income is likely to be sourced from state benefits, savings and possibly redundancy or unemployment insurance.
Prioritising and affordability
Affordability is a very important factor. There is little point in producing a recommendation if the client can not afford to buy the product (or keep up payment of premiums). An adviser needs to establish how much disposable income their client has.
Once a suitable range of protection products have been identified the adviser will arrange to get a quotation done to find the best priced product which includes the features that the client needs.
Again, it is a fairly obvious point, but if the adviser needs to prioritise the products because of affordability issues, they must think carefully about which of the suggested products are high priority and required now and those which they might consider in the future when the client has more disposable income.
What is classified as a short term capital need in terms of the need for life assurance?
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