Receding heir line

Demographic and structural changes mean people are living for longer than ever before. To a certain extent this should spell good news for life offices. Life cover has fallen dramatically in cost over the last few years. Indeed, with a 40% fall, take-up should be much higher. However, this is being offset to a certain extent by another demographic factor ' the reduction in marriage and the delay of house purchase.

These effects have combined to create a new type of client ' the middle-aged, young family. And with it brings a different approach to both insurance and general financial planning needs. It also has massive implications for the way products should be marketed.

Decisions for life

House purchase and marriage tend to be the key times when people take out life assurance. Cover is frequently sold at the same time as a mortgage. By the same token, both life assurance and mortgage take-up frequently occur at marriage.

However, according to the Government Actuaries Department, the rate of marriage has fallen from 55% in 1996 to 45% by 2001 and people are now getting married later than ever before ' only 16% of women are now married between the ages of 16 and 29, compared with 42% in 1981. While traditionally life companies might receive premiums from people aged in their early 20s and above, they now have an extra 10 years in which people are not paying premiums.

Equally, the massive house price appreciation in the UK has meant that the average person in the UK puts off buying a house until they are 33. Even though cohabitation levels are down, single take-up is higher and there is some good news for insurers ' the total amount borrowed, and therefore insured against, has rocketed as house prices have. Despite this, however, life assurance take-up remains low among people in their 20s.

To compound this, the grey demographic skewing does not offset it, since people tend to either reduce or eliminate life assurance policies as they get older. Although life cover is frequently used as a means to pay Inheritance Tax (IHT), not enough people face IHT liabilities to provide significant revenue from this source. Equally, although house prices have risen considerably, few people remain fully aware of potential IHT liabilities arising from this.

Furthermore, the other main driver of protection business ' having children ' is being affected by demographic pressures. As with marriage, people are having fewer children than ever before, and having them later in life. It looks only to be a short time before the death rate in the UK exceeds the birth rate.

Older families are likely to have different characteristics to younger families, with larger incomes and more disposable cash. They are likely to be more financially savvy and business aware. They might also have existing financial arrangements in place. In short, they are likely to be a more mature, more discerning audience.

They are also likely to be more concerned with their personal health as they start to approach their middle-age years, providing opportunities to talk about critical illness (CI) cover or private medical insurance (PMI). With a family to support, they will also probably wish to protect their income if they cannot work. That said, they might have built up an emergency nest egg for such an eventuality.

Older families are also going to be much closer to retirement, meaning they will probably be looking to contribute more to their pensions than younger families. This may affect the disposable income they can afford to put into protection products as well as their attitude towards protection and its necessity. They might even face the scenario that they are retiring around the same time as they are paying for their children to go to university ' creating a financial-planning double whammy.

All this points to a more sophisticated, savvy consumer with a need for flexibility to help them achieve multi-faceted financial goals. It should therefore seem logical that the products available to them reflect this need.

Menu products

The recently launched flexible menu product seems more akin to this sophisticated customer, giving them a menu of protection, and a means by which high premiums, which are curtailing demand, can be reduced. Most life offices are offering such schemes, and they look to become increasingly popular with IFAs and clients.

But would it be possible to go further with flexible products and tap into a combination of investment and protection products to further reduce costs? Could the next generation of products offer an offsetting between investments and protection to create the ultimate cost-effective product?

For example, you could create a regular investment structured product which also includes income protection, so if the individual became ill, the protection payout would come from the insurance element of that product. Or a pension annuity could contain an element of life assurance, creating a payout upon the death of the assured ' offsetting the fact that the annuity would cease to pay an income to dependants.

Or perhaps you could have even more flexibility, so an individual could increase their pensions contributions or reduce their life assurance contributions depending on their financial circumstances. This offsetting could create the closest possible attempt at producing products which could reflect individuals' changing circumstances and would give them the best possible mix of protection and investment.

The complexity of such products would undoubtedly be huge. Equally they are unlikely to sit comfortably with Sandler's notions of low charges and product simplification. But they would almost certainly simplify the life of the consumer. Moreover, by creating increasingly flexible products, life offices could become a one-stop shop ' rather than competing on individual products.

However, the advantages created would be enormous. For life offices, it would generate enormous customer loyalty ' akin to the kind of retention rates banks currently enjoy. Moreover, it would stop the increasing practice of double insurance, thereby increasing the insurance industry's efficiency and making insurance more attractive to investors.

It would also breathe life into this new demographic of middle-aged parents. While their younger counterparts may not have the same sophisticated financial planning needs, more mature parents need more mature products. And these, increasingly, will have to reflect their more complex financial-planning needs.

It is becoming clear the demographic pressures are evolving financial services far faster than anyone could have predicted. It is also clear that companies will have to respond to this to remain competitive.

More sophisticated product development looks set to be the only way to win increasingly sophisticated consumers in an increasingly competitive market. To what extent true flexibility is achievable remains to be seen.

One thing is certain, with demographic pressures changing so fast, protection for young families will be one of the fastest-changing and fiercely courted financial services areas.

Charles Ansdell is senior technical adviser at Inter Alliance