Protection Gaps Case Study: Smarter Cover for a Family

A 42 year old self employed client approached Castle Stonebridge after taking on a larger mortgage and wanted to review their existing Life Insurance. They were mainly concerned with making sure their family and mortgage would be protected if they died, but a wider review identified several protection gaps that their existing policy did not address.

Rather than simply replacing the existing policy, we reviewed the client's mortgage, income, family circumstances and existing protection to build a more comprehensive solution. This resulted in a more appropriate combination of Life Insurance, Critical Illness Cover and Income Protection, while also reducing the cost of the client's Life Insurance.

Identifying the protection gaps

The client's original arrangement was focused primarily on what would happen if they died. That was an important consideration, particularly with a mortgage and family to protect, but it did not address what could happen if they were unable to work because of illness or injury.

For a self employed person, losing an income can create a significant financial pressure. Mortgage payments and household bills still need to be paid even when someone cannot work.

The review identified that the client's existing cover could be structured more effectively around their mortgage while also addressing the wider protection gaps created by illness, injury and loss of income.

What changed following the review?

The existing Life Insurance was reviewed against the client's current mortgage and circumstances. Because the mortgage was expected to reduce over time, a Decreasing Term policy was more closely aligned with the debt meaning the premium and benefit reduces in line with the mortgage..

The client was also able to add Critical Illness Cover and Income Protection, providing protection against risks that the original Life Insurance did not cover.

The result was broader protection designed around the client's actual financial commitments, rather than simply increasing the amount of Life Insurance they already had.

Why was Decreasing Term Life Insurance appropriate?

The client's mortgage was expected to reduce over time, meaning the amount needed to repay the mortgage should also reduce.

A Decreasing Term Life Insurance policy is designed to reduce over the term, making it commonly suited to mortgage protection. MoneyHelper explains that Decreasing Term policies reduce the level of cover each year, unlike Level Term Insurance where the amount remains the same. MoneyHelper's Life Insurance guide provides further information on the different types of cover.

In this case, restructuring the Life Insurance reduced the premium from £22 per month to £14 per month while keeping the mortgage protection objective at the centre of the policy.

Adding Critical Illness Cover

One of the key protection gaps identified was what would happen if the client survived a serious illness but was left facing significant financial consequences.

Critical Illness Cover can provide a lump sum if the policyholder is diagnosed with one of the specific conditions covered by the policy. The money can be used towards a mortgage, household costs, treatment or other financial commitments, depending on the client's circumstances.

The client therefore secured £50,000 of Critical Illness Cover for £27 per month.

MoneyHelper explains how Critical Illness Cover works, including how the level of cover can be considered alongside mortgage commitments, income and other protection.

Protecting the client's income

The biggest remaining protection gap was the client's income.

Life Insurance would provide financial support following death, while Critical Illness Cover could provide a lump sum following a qualifying diagnosis. Neither policy was designed to replace the client's regular income if an illness or injury prevented them from working.

Income Protection was therefore incorporated into the new arrangement, providing income replacement should they be unable to work due to illness or injury for just £17 a month.

This was particularly relevant because the client was self employed and their ability to earn was closely connected to their ability to work. MoneyHelper's Income Protection guidance explains that Income Protection can provide regular payments when illness or injury prevents someone from working, subject to the terms of the policy.

Do I need Critical Illness Cover if I have Life Insurance?

Life Insurance and Critical Illness Cover protect against different events. Life Insurance generally pays out following death, whereas Critical Illness Cover provides a lump sum following diagnosis of a qualifying condition.

Having one does not automatically mean you have the protection provided by the other. Whether both are appropriate depends on your income, mortgage, family circumstances and existing financial resources.

How much Life Insurance do I actually need?

There is no single amount that is suitable for everyone. The right level can depend on your mortgage, other debts, dependants, income and any existing protection through work or elsewhere.

In this case, reviewing the mortgage alongside the policy structure meant the Life Insurance could be aligned more closely with the debt rather than simply maintaining the previous arrangement.

What's the difference between Income Protection and Life Insurance?

Life Insurance is designed to provide a payout following death, helping dependants deal with the financial consequences of losing an income. Income Protection is designed to provide an ongoing income if illness or injury prevents you from working.

For someone with a mortgage and family, the two can therefore address completely different financial risks.

Could a protection review save me money?

It can, although there is no guarantee that reviewing protection will reduce premiums. Changes in age, health, mortgage, occupation and the type and amount of cover required can all affect the cost.

In this case, changing the Life Insurance structure reduced the premium from £22 to £14 per month while also allowing the wider protection strategy to be reviewed.

The outcome for the client

The review changed the client's approach from simply protecting the mortgage against death to considering the wider financial consequences of illness, injury and loss of income.

The client left with a more comprehensive protection strategy covering their mortgage, family and income, while the Life Insurance element was reduced in cost.

The case demonstrates why a protection gaps review can be valuable when your circumstances change. A larger mortgage, growing family, changing income or becoming self employed can all change the level and type of protection you need.

At Castle Stonebridge, our Independent Financial Advisers can review your existing arrangements and help identify where protection gaps may exist.

Disclaimer* This case study is based on a client scenario and has been anonymised. Figures are provided for illustrative purposes and individual protection needs, premiums and policy terms will vary. Protection policies are subject to eligibility, underwriting, definitions and exclusions.