Barry’s story – it could have been you!

by Property 118

5 years ago

Barry’s story – it could have been you!

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Barry’s story – it could have been you!

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

Landlords Life Insurance Calculator

What is the minimum amount of landlords life insurance would you need to buy to enable your loved ones to refinance and maintain cashflow at current levels?
1 Your property portfolio
2 Requirement
3 Get a quote
4 How can we contact you?

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:

  1. 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.
  2. 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.
  3. If they had not already done so they would recommend Barry and Sharon make a Will and to set up Lasting Powers of Attorney.
  4. 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.
  5. 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!
  6. 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.
  7. 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.
  8. 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.
  9. 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.
  10. 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

Part one – Should buy to let landlords buy life insurance?

Part two –  What happens to mortgages when a landlord dies?

You are here >>> Part three – Barry’s story – it could have been you!

Part four– Why up to 40% of your life insurance payout could end up in the hands of the tax man.

Part five – Financial Advice – how do you pick an adviser?

Update 16th May 2013

Landlords Life Insurance Calculator

What is the minimum amount of landlords life insurance would you need to buy to enable your loved ones to refinance and maintain cashflow at current levels?
1 Your property portfolio
2 Requirement
3 Get a quote
4 How can we contact you?

Comments

Tom Conner

5 years ago

I think this real life example shows how important it is to take a more holistic view to protection by considering a wider range of possible out comes. The key question raised here is what would happen if there was a disabling illness or injury in the family? If care needs to be provided it might not be possible for the other partner to work more to try and make up the income shortfall. This is why critical illness cover is an important option to consider with life insurance. You may have already seen the mortgage risk of death calculator and been surprised by the results so it is important to consider that the chances of suffering a critical illness condition is far higher than that of passing away. The calculator can be found here:
http://www.property118.com/index.php/life-insurance-calculator-buy-let-landlords/

Paul Barrett

5 years ago

This critical illness insurance is all very well but the cost is prohibitively expensive. especially when combined with life insurance premiums.
For the average LL it is unaffordable even though not to afford it is to say the least NOT a good idea.
To find affordable critcal illness insurance which covers not being able to work in the previous occupation rather than any occupation is just too expensive for most people.
Then there is the way benefits might be affected due to the way CII is paid out.
It is not as simple as it seems which is why most people don't bother.

Mark Alexander

5 years ago

Hi Paul, I think you are mixing up Critical Illness Insurance with something else, Income Protection Insurance perhaps? Please don't quote me on these stats as I can't recall where I heard them but I believe we are 7 times more likely to suffer a Critical Illness than to die before retirement age. Critical illnesses include heart attacks, strokes and others. No doubt one of the financial advisers following this blog will be able to confirm stats and better definitions. Critical illness is more expensive that life insurance due to the risks being higher but it is still affordable and there is an argument that you may not need as much of it. One of my cousins was a builder, he had a heart attack at the age of 36 and his critical illness insurance paid off his personal mortgage. It's like all insurance I suppose, you either pay the premiums or you risk paying the price. I'd rather transfer the risk to an insurance company, I'd rather go without a luxury than to carry the risk personally. The principals are no different really to you choosing to take Rant Guarantee Insurance, you prefer not to carry those risks.

Paul Barrett

5 years ago

Yes there are clearly different circumstances that are available and one may only know what is available by having a thorough conversation with a !FA.
Affordability is the key.
If all your positive cashflow disappears though in premiums it is not really worth doing.
RGI as an example is easily affordable at an effective cost of £1.25 per week.
I don't believe that these other insurances are anywhere near that price point!!
That is the nub of the problem.
But clearly it is down to the individual.
If a compelling case can be made to convince a LL of the efficacy of these insurance products then possibly the LL might give more due consideration to taking out such policies.
Perhaps some examples as to the costs of such policies for the average LL; if such a thing exists, would be a useful indication to LL to possibly spark enquiries from LL who may presently consider such insurances unaffordable.

Howard Reuben

3 months ago

Thank you Property118 for reproducing this story in this weeks newsletter.

Some people avoid the subject of life cover (to protect the BTL mortgage debts) because "my husband/wife will simply take over the properties and rents".

This may be the case if properties are owned in joint names, but for the very many BTL properties owned by one partner only, this just does not happen and as a consequence (as eloquently outlined in the main story above), the consequences can be hugely financially disastrous and devastating for the surviving family.

The argument is not whether then premiums are affordable or not, but actually whether the resulting issues and problems are important enough to mitigate / eradicate.

As a BTL property owner with a BTL mortgage, or mortgages, or loans, or finance, or whatever you want to call it, the loan secured on your property is a repayable debt.

This debt - upon death of the borrower - is to be repaid.

Quite often the property has to be sold and this could mean;

CGT on sale proceeds
reduced sale price for quick sale
upon sale, no longer any ongoing rental income for the family
and no future growth to be achieved in the property value
and if sold via an estate agent, then their fees are payable
and so are the solicitors
if partners not married, then also possible IHT on estate value upon transfer

OR

a simple life insurance policy (initially set up in Trust from the outset) could repay the mortgage(s), the property(ies) would be transferred via a Will, the rental income (now gross amount as no mortgage is being deducted) continues to be paid to the surviving family, and a future inheritance / estate wealth plan remains in situ too.

This is how we have been advising and helping our clients for many years.

The initial main objection to even discussing it has of course been the cost .... until the figures were calculated and the actual net cost and benefit were presented.

We strongly recommend that BTL mortgage life cover is a crucial piece of business financial security planning, and as BTL is a business (no matter which way you look at it!), so sound financial planning is essential.

For a personalised financial plan for your own circumstances, you can contact me and my Team via my profile link above.

Howard

Monty Bodkin

3 months ago

"The argument is not whether then premiums are affordable or not"

It is for most people.
How much would the total premiums be for 53 year old Barry to cover the £1,400,000 mortgages over a 20 year term?
Hard to find out through the smoke and mirrors of insurance quotes but I'm guessing £100,000+

Howard Reuben

3 months ago

Reply to the comment left by "Monty Bodkin" at "01/08/2017 - 13:15":

Thanks for your reply Monty. My main point - based on years of IFA experience in just this field - is that "The initial main objection to even discussing it has of course been the cost .... until the figures were calculated and the actual net cost and benefit were presented." and "a simple life insurance policy (initially set up in Trust from the outset) could repay the mortgage(s), the property(ies) would be transferred via a Will, the rental income (now gross amount as no mortgage is being deducted) continues to be paid to the surviving family, and a future inheritance / estate wealth plan remains in situ too."

Your scenario seems to imply that "£100,000" is far more costly than the £1.65m / 23 properties being lost /having to be sold in the Barry story.

It's all down to everyone's personal objectives of course, however in our experience most conscientious people do indeed wish to leave the surviving family with the least amount of grief, stress, and financial detriment.

My strategy above enables this to be implemented.

Final note on the cost of premiums; of course these come from the property bank account, which should be receiving a gross rent much higher than any mortgage payment, and we know from the many serious financial planning clients we have worked with over many years, that the surplus then pays the life cover premiums, and does not seriously affect personal income drawn from the business.

Monty Bodkin

3 months ago

Reply to the comment left by "Howard Reuben" at "01/08/2017 - 13:34":

What I'm saying is using simple life insurance to cover the whole debt over the whole term works out very costly.
Which could be unnecessary with better ways to mitigate the risk- such as putting the properties in joint names as you mention (and I'm sure you advise clients accordingly after having assessed their full circumstances).
So on this one factor of many, using reasonable assumptions ;
How much would the total premiums be for 53 year old Barry to cover the £1,400,000 mortgages for the next 20 year term?
I believe my £100,000 guess to be considerably understated.

Howard Reuben

3 months ago

Monty
If Barry Story (the name I am giving him for example / illustration purposes) died one day after taking out the policy, he would have laid out a total premium of £289.82.

And yet the insurer would have paid out £1,400,000.

This is the cost of a standard rate, non smoker, male 53 years old, with a £1.4m sum assured on a level term basis, on a guaranteed (ie fixed) rate basis, over a 20 year term.
(I have produced this quote and have saved it as a pdf copy for reference).
If, however, he fortunately survives 20 years, the total amount - for absolute peace of mind - is as follows;
£289.82 x 12 x 20 = £64,800
Far, far less than the £100,000+ figure you are assuming.
Insurance is all about risk. Yes, it's also about cost as there is indeed a premium to pay, but if you have 23 properties and £1.4m of mortgages / debts , I will bet my own house and portfolio of BTL's that the gross amount of rent coming in is substantially more than the life cover premium of £289.82 pm.
Back to my point - life cover should be a crucial part of any financial planning, and with our own Professional service of arranging policies in to Trust (at no extra cost), implementing a flexible review strategy (at no extra cost), ensuring the Trustees are fully appraised of their legal responsibilities and duties (also at no cost, and something that most insurance salespeople - whether face to face or online - don't ever do), I believe that my experience holds well against the objection that cost is the deciding factor.
Peace of mind, debts repaid, families left financially secure, and premiums at a minimal percentage of income received .... ok, I have made my point and I don't need to add any more.
Except to say Monty, when you choose to have a professional review of your own personal circumstances - and this is of course an invitation to everyone as well - please contact us and we would be delighted to assist.
Howard

Mark Alexander

3 months ago

No need to insure the full debt either though, see the calculator at the bottom of the article

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