Taking out protection is rarely on the agenda of the average person in their 20s. But with this age group often leading a more financially precarious life than older generations, the insurance industry needs to do more to boost take-up.
The Office for National Statistics’ latest Wealth and Assets survey highlights how few young people have a financial safety net in place. It found that while 26 per cent of respondents would run out of money within a month if they lost their main source of income, the figure increased to 48 per cent for those aged 16 to 24.
For these individuals, protection should be a key financial planning priority. At a time when money might be too tight to build up sufficient savings to see them through tough times, income protection and critical illness insurance can give the reassurance that, if the worst did happen, their finances would be secure.
Youthful advantage
From a cost perspective, there are benefits to taking out cover while young. Premiums increase with age but, as Rob Harvey, independent protection expert at Drewberry Insurance, explains, other factors can also help to keep premiums affordable.
“A younger person will often be in better health. This means they can lock in cover on better terms than someone who is older and may have developed health conditions,” he says.
Even without the potential for a less-than-perfect medical record to load an older person’s premiums, cover is much more affordable. According to figures from Drewberry, a 20-year-old would pay £20.26 a month for income protection to cover the average UK salary (£1,249 a month) up to age 60. Delay this purchase for 10 years and, assuming no changes to their health, the premium would have increased to £29.92. See Table 1.
Table 1: Premium examples of protection products
Policy type | Age | |||
20 | 25 | 30 | 40 | |
Level term insurance | £7.35 | £7.62 | £10.05 | £19.74 |
Level term + critical illness | £31.08 | £38.00 | £54.69 | £118.58 |
Income protection | £20.26 | £25.24 | £29.92 | £44.82 |
Notes: Quotes based on a non-smoking office administrator. Level term: £250,000 sum insured for 25-year term. Income protection: £1,249 a month benefit, four week deferred to age 60. Source: Drewberry Insurance. Copyright: Money Management
Although this is only a few pounds more, potentially at a time when salary increases may mean spare money is available, it pushes up the overall cost of cover. Taking the cover out at age 20, would result in a total cost of £9,724.80 – start at age 30 and the total cost would be £10,771.20, even though the term is 10 years shorter.
Future flexibility
Protection policies are also flexible enough to adapt to changing circumstances. Guaranteed insurability options enable a policyholder to increase cover up to a set limit without requiring further medical underwriting. This means that although the additional cover will be charged at a rate corresponding to their age, it would not be loaded for any health issues they may have developed.
Being able to lock in future cover at preferential rates is sensible says Mr Harvey, but he believes this is an area that is ripe for an update. He explains: “Guaranteed insurability options are dependent on events such as a mortgage, marriage or the birth of a child, but this is fairly limited, especially in today’s world. Insurers should consider building in more flexibility.”
