Life Insurance Case Study

Henry (32) and Tanya (29) are married and have 3 children, aged 9, 6 and 2. Henry is a gas engineer and has worked for his employer for 12 years. His salary (£32,500), with overtime, is £37,600 per annum, he is a member of his employer’s pension scheme and he receives 3 times his salary as his death in service benefit and a sickness package of 3 months full pay and 3 months half pay.

They have a house valued at £270,000 with an interest and capital repayment mortgage of £180,000 in joint names, which they moved in to 2 years ago as they needed more room. They have a decreasing life insurance policy in joint names to protect the mortgage.

Their monthly expenditure is manageable as Henry’s salary pays the bills and his overtime allows for holidays, meals out and things.

They made an appointment to look at Henry’s pension. During the appointment the adviser asked if they had any plans to move? Tanya said no, as the children’s schools and all their friends are in the area. So, if one of you were to pass away, then the mortgage would be paid, said the adviser. Yes, they replied. No mortgage, but you would still have the bills, so if Tanya was the one who died, then Henry would continue to work and his salary would continue to pay the bills? I suppose so. Who would look after the children while Henry is working? Tanya, if it were Henry to pass away first, what then?

The adviser suggested that if Tanya were to die first, then help would be needed to look after the children, which could cost around £500 per week, £2,000 per month or £24,000 a year. To provide this income a lump sum of £800,000 would be needed, which when placed on deposit or invested and returned 3% per annum. However, if Henry was to pass away first, then Tanya would need at least £32,500 (Henry’s salary) just to pay the bills. Henry’s pension could provide a widow’s pension of around £6,400 per annum and therefore, an additional annual income of £26,100 would be needed. Using the same formula as we used before, then a lump sum of £870,000 less £97,500 (Henry’s Death in Service benefit) or some £772,500.

As the youngest child is only 2, it was suggested that the term of the policy should be set at 15 years, to co-inside with school leaving age, but it could be prudent to look at a term 18 or 19 years, if University was an option.