Financial Planners (New), Life Cover Shortfall

In order to clearly identify the asset and its repayment, let’s continue with Fred Bloggs as shown below, who has bought a £150,000 home and just has a £120,000 repayment mortgage over 25 years, but now without any other income or expenditure. We’ll also give him a free £100,000 Level Term Assurance policy (i.e. the cost will not be included in his expenditure) to protect against his liability on death.

Note that the term assurance would be irrelevant if Fred’s assets could be sold on death, as a single person. So for the sake of this example we’ll assume his home can’t be sold on death. This way he will be liable for the outstanding mortgage, and we can “play” with his term assurance plans to see what they cover.

His Lifetime Cashflow shows how he has to pay a level £8,000 p.a. for his mortgage, and otherwise has no income or expenditure until he automatically receives his state pension in 2058.

Meanwhile his Net Worth, below, shows him getting into serious trouble because he’s paying the mortgage without receiving any income (i.e. it’s coming out of his bank and then his “Additional Debt” or long term loan account).

You can edit the default rate for this Additional Debt by clicking the “Setup” button on the spreadsheet, then click the “Other” tab and adjust the figure for “Additional Debt Interest Rate %”, shown below at 7%. This is the rate assumed by the planner when the overdraft limit has been reached.

The standard sequence is…

1) Take money from the current bank account till the overdraft limit is reached (e.g. at 5%, as specified in the fact find)

2) Then take money from the credit card till its limit is reached (e.g. at 19%, as specified in the fact find)

3) Then take money at the “Additional Debt” rate (e.g. at 7%, as specified on the Setup screen below)

Of course if you set the credit card limit in the Fact Find to zero then it won’t be used in this sequence, or alternatively you could edit the settings for the credit card’s “Lower Limit” or its “Sale Order” in the planner by right-clicking them.

All of the system’s standard settings are editable, as shown below, but some cannot be done not via the “Setup” button. Instead they can only be adjusted by Durell’s Support Team in response to a valid request.

Now let’s consider his life insurance, and to keep things simple let’s assume he has a 100% repayment mortgage for £100,000 over 25 years, with matching LEVEL term assurance of £100,000 as shown below. You can see that his overall growing liability is reduced by that sum for the 25 years of its term (i.e. he has no liability in 2011 when he starts his £100,000 mortgage, and the figure for 2035 is still £100,000 below that for 2036).

With term assurance INCREASING at 5% p.a. as you can see below, he has very little shortfall if he dies during the term of his mortgage. However his life cover ends in 2035, by which time without income, he will leave his estate with a very substantial overdraft.

Finally return to the spreadsheet and adjust the “Sum Assured Annual Change” to minus 5% to check the situation with term assurance DECREASING at 5% p.a.

As you can see, below, this results in his £100,000 liability being fully covered at the start of the term in 2011, decreasing towards the end (the decreasing amount is indicated by the green area). By the end of his mortgage term he has very little life cover, very little remaining mortgage liability, but an increasing overdraft.