This vlog: Financial Planning Protection Needs for a Young Family demonstrates the situation of a young family who have just bought their first home and have a small child. We model their financial situation based on the tragic event of a premature death in the family.
Andy age 36, is married to Sarah and they have a 5-year-old daughter Lucy. Recently they have bought their first family home and taken on a large mortgage, so clearly there are some issues they should consider from a financial planning perspective.
The couple purchased the property using the proceeds of a lifetime ISA and some savings as a deposit and took on a mortgage for the remaining amount. The house purchase pretty much wiped out most of their savings, but they do have a small amount in an emergency reserve.
They bought the property for £250,000 with a mortgage of £160,000.
They have both been members of their workplace pension arrangements since they started working so they each have a small balance and both continue to make contributions to the scheme as a savings vehicle for their retirement.
Andy has an old income protection policy, which we recommended he put into place when he was 24, his salary has moved on a lot since then and they have a lot more commitments so that is something we will look at during a review.
In terms of forecasting their financial future our financial planning cashflow software shows where they are now aged 36, right through to age 100.
Each column represents a tax year, the light blue represents their income, and the black line represents their spending, and we can see there is a surplus above the black line, which means they have more than sufficient income to meet their needs plus some discretionary income for things like holidays etc. With the surplus income we may suggest this is redirected to help them being to save for their future looking at things like increased pension contributions or ISAs but given that they are only age 36 and have a 20 year timeline to retirement, this is not an immediate priority for their family.
The main area of focus in financial planning, particularly where there are children and debts involved is the need for protection. Protection in the event of death, critical illness or loss of earnings. This presentation models the impact of Andy, as the higher earner of the two dying aged 40, and the impact that would have on the family’s income and financial future.
As you can see from the cashflow charts, there is now a lot of red on the chart due to the loss of Andy’s income. Which highlights the need to look at protection as a priority.
So, what can Andy and Sarah do to ensure they are protected in the event of death?
For Andy & Sarah we would recommend they implement the following policies:
- Mortgage Protection (Life insurance) which would give a lump sum pay-out, allowing them to redeem the mortgage and have an additional lump sum which could be used to give Sarah additional income. Our model is based on a protection policy with a benefit of £400,000.
- Family Income Benefit. This type of policy can provide an annual lump sum or regular lump sum for a specific term. Which can work as an income replacement. Particularly useful whilst children remain in education.
- An increase in the level of benefit Andy’s Income Protection policy will provide, given he is now on a higher salary. This policy would payout in the event Andy was unable to work due to illness.
Protection is an important part of financial planning and an area for consideration in all life stages but with a young family, debts and a reliance on a larger income, putting in place effective protection can give a family financial peace of mind.
As part of a review of their family circumstances, we would make sure the protection premiums were affordable to them and also recommend they save a little more into an emergency fund to cover say 6-12 months of expenses needs in case of emergency/ad hoc spending requirements. With any further surplus we would look at ways in which they could begin to save for more their retirement looking at options for both pension and investment.
This is a great demonstration of the power of financial planning for all life stages and shows the importance of having adequate protection in place. In this scenario, Sarah and Lucy are well provided for in the unfortunate event of Andy’s premature death.
Sound financial planning covers all life situations, and we firmly believe that there is a place for financial planning in everybody’s financial circumstances.
For more information on planning your financial future talk to us.