Barry’s story was written by the Mark Alexander back in December 2010. It has since been updated and re-published. The dates, times and people are fictional but the story is based on real life events.
It’s a modern update of the classic “A Widow’s story”, this time written as a cautionary tale for landlords and their families.
Barry is 53 years old and married to Sharon. They have three teenage children; twin girls aged 15 and a 13 year old son. Barry worked as a self employed salesman in the plant hire business. Sharon had a part time secretarial job in a local school.
Barry and Sharon purchased their first investment property in 1996.
As property values have risen they have continuously remortgaged and used a proportion of the equity released as deposits to purchase additional rental properties. They also saved a proportion of the equity released for a rainy day. To accelerate the growth of their portfolio Barry and Sharon raised extra cash for deposits by remortgaging their home. The profits from Barry’s plant hire business covered the family’s commitments comfortably.
By August 2008 they had accumulated a portfolio of 23 properties with a combined valuation of £1,650,000, against which they had mortgages of £1,400,000. The portfolio produces rental income of £87,000 per annum. Their rainy day fund amounted to just over £64,000. By having all of the above in place you might be forgiven for thinking that they had set themselves up with a very safe future.
On Sunday 21st December 2008 Barry had a bad day. He was on the way home that evening having just been out to fix a tenants leaking shower tray when the traffic on the M6 came to a grinding halt. Barry managed to stop his car, avoiding the lorry in front of him, but the car behind him ploughed into the back of him, wedging his car under the lorry.
The emergency services managed to free Barry from the wreck and his only damage was shock, whiplash and major bruising to his legs. Two days later Barry collapsed whilst out shopping for last minute Christmas presents. He was rushed to hospital where it was discovered that a blood clot in Barry’s leg had passed to his brain. Barry had suffered a major stroke.
He lost his speech and most of the use of one side of his body. The family were in tatters. Sharon had to give up work to care for him.
Up until having a stroke Barry had managed the property portfolio and taken care of most of the maintenance himself. Could Sharon care for her husband, her family and the management and maintenance of the property portfolio too?
They considered putting the properties on the market but soon realised there would be no takers at the prices they needed to achieve. Sharon has had to employ a lettings agent to manage the portfolio. Since then it has cost the family an average circa £3,000 a month to pay for ongoing maintenance and management.
Fortunately there has been some good news, at least financially. First, low interest rates have meant that Barry and Sharon’s mortgages have got much cheaper. Many of their mortgages have reverted to tracker products due to their fixed rates coming to an end. The family have resigned themselves to the fact that they probably have negative equity now and they will not be in a position to sell up in the foreseeable future. They are focussing on Barry’s recovery and looking forward to the remainder of their fixed rate mortgages coming to an end. What will happen when interest rates go back up again though?
The real saviour for the family has been insurance. Fortunately, Barry and Sharon were astute enough to insure against these eventualities. Barry and Sharon took out life assurance policies that pay out a regular monthly income right up to Barry’s 65th birthday. These policies were written on the basis that they also pay out in the event of a critical illness. The family are therefore confident that these provisions will see them through these troubled times and out the other side. They will then revert to plan A which was to live off surplus rental income over and above the mortgage payments on their portfolio or to sell the properties and live off their gains.
What insurance provisions have you made for your family?
How are you investing the windfall of increased cashflow that record low interest rates have produced for your family?
Have you made similar provisions to Barry and Sharon? If you haven’t it may not be too late, we want to help. If you have already taken advice and put insurances into place we would like to introduce you to Financial Adviser to review your policies and ensure they are competitive and that the right person gets the right money at the right time.
Update 16th May 2013
A Financial Advisers recommendations based on Barry’s story
To address the risks identified within Barry’s story, an Independent Financial Adviser (IFA) on our panel would have recommended the following:
First they would have discussed their property investment strategy, i.e. to have a 10 – 15 year strategy, high gearing combined with high liquidity, cash is King hence the strategy of an interest only loan structure, building a war chest or a rainy day fund to allow for the unexpected, release equity whenever a realistic window of opportunity exists and keep buying.
They would have geared all of the insurance recommendations to match with the couples 15 year investment strategy which coincidentally would take Barry to a normal retirement age of 65.
If they had not already done so they would recommend Barry and Sharon make a Will and to set up Lasting Powers of Attorney.
They would suggest to Barry and Sharon that they should speak to their lenders about adding their children to the buy-to-let mortgages and to the title of the property at the age of 18 so that in the event of death, the children could talk to the lenders about keeping the mortgages, assuming of course they are still competitive. Without this provision there is a greater risk that the lenders would demand repayment which could force the sale of the properties or refinancing. Good mortgages are a great asset.
They would recommend that all life insurance policies are written into trust to mitigate against any potential Inheritance Tax (IHT) liabilities. By placing the life assurance policies into trust before they are claimed upon involves the transfer of an asset with no value, hence no tax needs to be paid. When the policies then pay out they no longer form part of the insured person’s estate. Failure to write life assurance into trust could result in up to 40% of the proceeds being paid in Inheritance Tax instead of passing to the intended beneficiary!
The first priority in terms of insurance would have been to ensure that Barry and Sharon can keep a roof over their heads. They would have recommended a joint life policy for 15 years for Barry and Sharon for £174,000 to repay the mortgage in the event of death, prepaid in the event of critical illness.
They would pass the risk to an insurance company on Barry losing his ability to manage his property portfolio in the event of a critical illness. Therefore, they would have recommended insurance policies for Barry to produce a benefit of £35,000 per annum up to Barry’s 65th birthday, paying out in the event of death or critical illness. They would have recommended product providers whose policies also provide critical illness benefits for their children. This is because it can be devastatingly traumatic, not only emotionally but also financially, when parents have a sick child and need to choose between going to work to pay their bills or being by a sick child’s bedside. The selected product providers could provide all of the recommended life assurance and critical illness policy recommendations under a single plan, thus reducing policy charges.
Barry’s net income excluding rental profits is around £50,000 per annum. To insure the family against Barry’s loss of income due to death, terminal illness or critical illness they would have arranged insurance of 10 times his income, i.e. £500,000 to cover these risks. This could then be invested and drawn upon to supplement Barry’s financial contribution to the household to his retirement age.
They would have recommended a Family Income Benefit policy for Sharon to produce a benefit of £1,000 per month to Barry’s 65th birthday, paying out on the first event of death or critical illness. The purpose of this policy being to pay for a house-keeper to do everything that Sharon does if she is unable to do so in the event of a critical illness, and to cover her financial contribution to the household.
They would discuss landlords insurance including property and contents, landlord’s liability and loss of rent cover.
Finally, and most important of all would be the presentation of the recommendations. Taking out the right insurance for the right reasons is matter of life and death. It is vital that the right advice is given to ensure that the right money goes to the right person at the right time. Good financial planning involves a substantial but affordable financial commitment to address the risks that we all face in life. In our experience, clients forget why they took out the policies over time. It is in their interest of both the client and the Financial Adviser that this does not occur, otherwise they may be cancelled. This is why Financial Advisers produce a much more detailed account of the above, together with Key Features Illustrations and Statutory ‘Reasons Why’ letter. They would then advise Barry and Sharon to keep this document in a safe place with the policy.
Related articles in this series
You are here >>> Part three - Barry’s story – it could have been you!
Part five - Financial Advice – how do you pick an adviser?