Bringing up baby

Simoney Kyriakou

Deputy editor of
Financial Adviser

First-time parents often underestimate many costs so some careful financial planning is a good idea, writes Simoney Kyriakou

The arrival of a first child always fills families with excitement. Buying things for the little bundle of joy, sorting out parental leave, taking a million photos until you have to add more GB to your phone – it’s all par for the course for a first-time parent.

But once the bills start to come in (higher heating costs, or greater expenditure on food and clothing), parents start to notice the cost that having a child is having on the household budget. And it will only get more expensive.

In fact, according to the Chartered Insurance Institute’s Insuring Women’s Futures report, there is a serious lack of financial resilience, not just among women but generally.

As mentioned in the report, the Centre for Economics & Business Research found the cost of raising a child born in 2016 to the age of 21 has risen to £231,834. This is a 65 per cent increase on figures from 2003.

Childcare alone can be expensive. Tom Conner, director at Drewberry, says: “Research from Child Poverty Action found that, in 2017, the cost of raising a child as a couple to the age of 18 stood at £75,436.

“And if you throw childcare into the mix because both parents need to work, then these costs rise to £155,100. This equates to nearly £8,617 a year. Clearly, the cost of raising a child really adds up.”

It is good to have some ‘rainy day’ savings but if there is an emergency, you never know if it is going to be enough. — Jennifer Gilchrist, Royal London

Thank goodness one or both parents work, right? But what if they cannot? What if the main breadwinner is made redundant, or has an accident and cannot work for a few months?

Ian Sawyer, managing director of Assured Futures, comments: “Savings are often inadequate, and for families saving is hard and takes considerable time to build up a useful pot. After all that hard work it would be tough for the family to see this quickly disappear when a 'life happens' event hits.”

A survey carried out earlier this year by Scottish Widows found 21 per cent of Britons admitted their household would not survive financially if they lost their income due to long-term illness.

Given these statistics, the financial resilience of families can seem fragile.

Jennifer Gilchrist, senior product development manager for Royal London, agrees it is not enough to merely have savings.

She comments: “It is good to have some ‘rainy day’ savings but if there is an emergency, you never know if it is going to be enough. People need to protect their savings as well, because it is good for families to do something nice with their savings, rather than just to use these up because a parent has had to take some time off work.”

Adding to this, Johnny Timpson, protection expert at Scottish Widows, says: “Without a steady income, families are under increased pressure of putting their financial resilience at risk. Those with little or no savings are even more vulnerable, especially when thinking about how they would cope with their commitments if illness strikes.”

State reliance

Many people might think the state will help – and it is true this does provide a safety net, but the state’s capacity to help is becoming ever-more constrained.

Tom Baigrie, founder of Lifesearch, warns: “While many simply do not have a plan B, other than relying on state benefits, many others express the hope that their parents or wider families would provide for them in emergencies.

“With state benefits running a long way below the minimum wage, let alone average earnings, parents who think it through soon realise that neither plan is viable for ordinary households other than for the shortest of times off work.”

When it comes to financial protection, unfortunately, many people will place more importance on insuring their belongings rather than their lives and health. — Johnny Timpson, Scottish Widows

So if savings are not enough, and the state cannot be relied upon, where can first-time families go?

Protection policies are a good place to start, and there are many different policies available, ranging from the most basic mortgage protection insurance, through to accident, sickness and unemployment, through to income protection and critical illness cover.

Depending on the age and health of the person applying for such cover, the cost per month to a household can be as low as £10.

Mr Timpson adds: “When it comes to financial protection, unfortunately, many people will place more importance on insuring their belongings rather than their lives and health.”

This does not just apply to the primary breadwinner, but also to those households where one parent decides to stay at home and look after the child. What if that person becomes ill?

“This underestimation in the financial value of a person’s role in the household can have a dramatic impact on the family – both emotionally and financially.

“It’s common for people to forget that it’s not just the bigger things like mortgages that need to be paid, but the cost of everyday things like childcare, cleaning the house, even grocery shopping, can all add up,” Mr Timpson explains.

Where to start?

Once parents realise the need for some financial protection, the next question they need to ask their adviser is what sort of insurance should first-time parents consider?

Ms Gilchrist says: “It depends. If people are thinking of having children or about to have children, they may already have some form of protection in place, whether through the workplace or if they have a house, they may have mortgage payment protection in place.

“But when a child is on its way or just arrived, this life event is a good time for people to talk to an adviser about their overall financial position, and this will include asking about protection and how much they will need.”

It's important to cover both wage earners if either makes a significant contribution to the household budget. — Tom Conner, Drewberry

Roy McLoughlin, associate director for Cavendish Ware, believes life insurance is an "obvious starter in protection conversations”. He explains: “[Having] little people often re-focuses the mind in terms of financial responsibility and vulnerability.

“Quite often people assume they have death in service when in fact they do not but on many occasions this is insufficient cover by itself.”

This is why he would also advocate having a fuller protection conversation with clients, one that encompasses income protection and critical illness insurance.

He explains: “Often, people forget about the situations that statistically are more likely to occur. Those being long-term illness and critical illness which have a five to one, or three to one, more likely propensity than death.

“Therefore, advisers should be encouraged to discuss all protection products with new parents and checking what they may receive from their respective workplaces.”

First and foremost

Advisers would definitely start with a decent IP policy, after discussing the case with a client.

Mr Baigrie puts it in a nutshell: “Providing for a replacement income in case of the eventuality of a parent being off work long-term through accident or illness is vital, and need not be expensive.

“The best value cover is IP and any protection adviser can guide clients through the simple hoops needed to apply for it.”

Mr Conner comments: “We’d recommend a comprehensive and preferably long-term IP policy that will pay out until retirement should one parent be unable to work due to an illness or injury.

“This will ensure core monthly outgoings are maintained, from the mortgage/rent, to utilities and groceries. Most two-parent families are now dual-income, with both parents working to make ends meet, so it's important to cover both wage earners if either makes a significant contribution to the household budget.

“If there's any budget left after this, then perhaps a CIC policy that will pay out a lump sum on diagnosis of a serious illness could also provide further security.”

Simoney Kyriakou is deputy editor of Financial Adviser

Published 05/11/2018

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