Taking care of risks

Welcome to the New Year and to a new advice service. Bryan Fisher, an independent financial adviser, starts a regular column today answering readers' questions. Readers are very welcome to write in for advice, but letters should not exceed 250 words please!

QUESTION: You may think that I am being rather pessimistic, however, please let me explain my circumstances. I am 42 years of age currently and run a profitable consultancy practice. My wife is not involved in the business and is very much a full-time mother looking after our four young children. We have a super home on which the mortgage is currently approximately pounds 90,000.

My concern is that if anything happens to my health I would not be able to meet our monthly financial commitments. I have savings of approximately pounds 7,000 in the building society and about pounds 4,000 in shares. However this would not last too long should I be unable to work.

My biggest concern is that several members of my father's family have suffered from heart problems. I need to look at covering any potential risk that I or my family may be facing. Can you help?

J.D.

Oxford

ANSWER I think you are being extremely responsible to address any potential problem. The question you have to ask is what would happen to your current standard of living if for example you had a heart attack? You have an endowment mortgage which has life insurance built into it, but this will not pay out on diagnosis of a heart attack.

Almost every expense you currently have will continue. The situation is likely to cause severe financial discomfort in less than six months even taking into account the savings you have made.

Incapacity benefit is now much more difficult to claim than the old invalidity benefit. To qualify for benefits you must be incapable of carrying out "any" occupation and not just your own.

Even if you are successful with your claim the benefit level certainly would not be enough to meet your existing financial commitments. There are two areas for protection that you will need to examine:

1) Income Protection (PHI)

This cover pays out a tax-free benefit which normally allows you to cover approximately 50-70 per cent of your income. There are various deferment periods which determine when the income starts being paid, following an accident or the onset of illness. The cover should ideally run to the age of 65 and be index-linked so that it will keep pace with inflation.

2) Critical Illness Protection

This is a relatively new form of cover, only 5 per cent of people in the UK have any form of cover at this moment.

Every year in the UK over half a million people will be diagnosed with either cancer, heart attack or a stroke. Many of these people will become financially dependent upon friends, charities or relatives.

Critical Illness Protection will create a tax-free lump sum on diagnosis of a range of serious illnesses for example: heart attack, cancer and stroke.

I would strongly suggest that both you and your wife apply for cover and at least cover the mortgage.

This needs to be the absolute minimum sum assured that is applied for and will ensure that should either of you suffer a serious/critical illness, at least the burden of paying the mortgage will be removed.

I would also stress that the insurance companies underwriting procedure on both types of cover is very tough and therefore there is no guarantee of cover being offered.

Bryan Fisher is an Independent Financial Adviser and the Financial Planning Manager at Berkeley Financial Planning in Coventry. He is authorised to give independent financial advice by the Personal Investment Authority. The advice is for guidance only and no action should be taken without obtaining specific and professional advice.