It is hardly news to mention that children and houses are expensive. These clients are probably both the text book example of people that need good risk protection – and people that will struggle to make room in their budget for the protection they need.
So, what is ideal for these people?
A couple of streets away friends of mine are in a similar situation to this, and they told me what they planned to do: cut out all the income protection, halved the trauma, and had enough life cover for the home loan and a residual $50,000 of trauma cover.
In the ensuring discussion I ended up promoting the idea of at least having some home loan/mortgage cover: sufficient to meet loan repayments if either adult becomes temporarily disabled.
Of course, not being a financial adviser, I had to refer them back to their adviser at the end of the conversation with a plea to at least consider the mortgage cover. It isn’t ideal, but it would help.
What bothers me is that ‘it isn’t ideal’ part of the equation. Surely what’s ideal depends on your goal.
If your goal is full indemnity – enough insurance that you can ‘live the same life’ – then the ideal is just that.
But what if your goal is ‘get the minimum cover to ensure we keep the house’ – perhaps there is an ideal cover for that goal?
Whenever I’ve been taught about goals I’m told that they have to be realistic. “Keep the house” is a realistic goal for most middle-market clients with affordability issues. Now what’s ideal for them?
Most advisers tend to offer life, trauma, and mortgage cover to this market. Typically, the life cover is to the full value of the loan, often plus a bit, the home loan cover is a premium product, an excellent definition of disability, with a ‘to age 65’ benefit period and lots of nice extras.
Banks take a different approach with at least two of the major mortgage lenders choosing to halve the life cover for each life and instead offer redundancy cover as a top up.
The mortgage cover is typically low cost – but limited to total disability, and often a two-year benefit period.
Although it is true that a two-year benefit period will cover most income protection claims, I wouldn’t choose to leave the other features of a good mortgage cover out of the mix.
I think the ideal includes partial disability cover, a strong definition of disability, no offsets, rehabilitation benefits, and cover increase options. Plus, what’s ideal now, given this budget, will change.
I like the idea of a mortgage cover that is the solid foundation for a full income protection as the client’s budget allows.
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