Author: Stephen Phillips, 03 July 2007.
Recent reports indicate that day care for children can cost as much as £180 a week or more in some parts of the UK. Employing a childminder can cost almost as much, at £141 a week. So
financial planning for young families should include thinking about how to cope with the loss of a parent – even one who is not in paid employment.
When you consider that average earnings in the UK were £447 a week last year, child care can take a large proportion of income; especially when tax is taken into account. Even if there are two incomes, this is still a significant expense.
But how would a widowed parent manage to cover the cost of child care alone? For someone on £25,000 a year, a child care bill of £180 a week would average £720 a month, assuming a 48-week year; that is not far short of half their take-home pay of £1,561 a month, allowing for tax and national insurance. And these costs are per child.
Financial Challenge
Of course, there is likely to be a substantial Working Tax Credit available (including Childcare element) under such circumstances. But child care is not the only financial challenge faced by a family when a parent dies, or is long-term incapacitated. Other "costs" can include:
- Extended support for children beyond normal school hours;
- Reduced principal income as remaining parent has to cut the hours worked to cope with children's personal and emotional needs;
- Additional expense for catering and home responsibilities;
- Extra "occasional" costs.
The death or long-term illness of a parent places a financial as well as emotional strain on any family, even if the parent was not in paid employment. Where they were economically active, the position is even worse because of the loss of their income. Therefore it is important to consider the need for
life insurance to cover not just the mortgage, but also all living and potential additional expenses.
It is not unreasonable to suggest that
life insurance cover should be in place to provide a lump sum on death of at least ten times each parent's income, or an income of at least two thirds of their gross earnings for long term illness. For a non-earning partner, then a lump sum of £250,000 or more on death might be considered reasonable.
Life insurance premiums depend on age, but to insure the life of a 25-year-old mother for £250,000 over 15 years could cost less than £10 a month for a non-smoker; more if critical illness cover is also required.
Nothing can compensate for the loss of a much loved parent or partner, but the right
life insurance can at least alleviate the financial cares naturally occurring at such a time.
Providing an income to cover the long term illness of a "non-working" parent is not quite so straightforward, as the maximum level of
life insurance cover available is normally related to income; so if there is no salary, how can a reasonable level be established? There are, however, a small number of companies recognising the importance of providing
permanent health insurance for parents who are not economically active and the level of cover can be negotiated with them.
It is important always to seek
independent financial advice before making any decision regarding your finances. We offer our clients a
holistic financial planning service so please contact us for further advice or assitance.
Alan Boswell Insurance Brokers Limited, Alan Boswell Insurance Services Limited and Alan Boswell & Company Limited are authorised and regulated by the
Financial Services Authority.
