The young ones

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Young, single clients need protection but will not always want to spend a great deal. Paul Robertson asks which areas they should be prioritising

Self-employed people in their 40s with children and a mortgage are not the most difficult market to sell protection to. The problem is that they frequently already have it. But there is a fairly large untapped market out there, which may be completely uninsured.

Young, single people may be financially soluble and yet may have given no thought to protecting their new found independence from disaster. This type of client is unlikely to be interested in spending a great deal on protection, so what are the main areas to focus on?

The issue advisers need to address with their clients is how much protection they want, versus how much they are willing to pay.

For unattached clients without dependents, most advisers would say the products to look at are critical illness (CI) cover, income protection (IP), even life cover, and, if there is a mortgage involved, mortgage payment protection insurance (MPPI). The question is how to prioritise these products, keeping cover to a maximum and cost to a minimum. Another question, when considering protection, is what would happen if they died, became critically ill, or were to never to work again?

For Diane Saunders of IFA Diane Saunders, the main priority is IP. She says: 'In my opinion, as soon as you have an income, you should think about protection in case you get ill. If you cannot live without income you should protect it. Young people have the advantage of being healthy and their age means costs are low. For someone in a low-risk job they could probably insure their income for less than a round of drinks per month, so why would anybody not want to do that?'

When asked, 'why not CI?' she says: 'Critical illness pays a lump sum for specific diseases, and for a young person you have to ask if you could invest that sum for an income if you were unable to work. Income protection on the other hand pays out until age 65. In my view, income is more important than capital.'

Brian Lentz, principal of Portfolio Insurance Consultancy, broadly agrees but points out that investing in CI does have its benefits.

'I would say that both income protection and critical illness would be the most important, because you do not have to be a certain age to suffer a medical problem that could see you not working. Critical illness can be paid in installments or a policy that pays you an income, so it does not have to be a lump sum. As far as critical illness cover is concerned, the younger you are, the greater the need and also the cheaper it is. It would be illogical not to look at both,' he says.

The bigger picture

From an insurer's point of view, Laura Shanks, product development manager of Scottish Equitable Protect, says advisers should first look at what the client may already be getting from their employer in the way of employee benefits, such as death in service. For a young person with no direct dependents this may be enough to cover any life insurance needs.

'For these people critical illness cover and income protection are probably the two key things to consider. If possible it should not be an either or situation as they both work so well together, but obviously sometimes a choice must be made,' she says.

It is important to note that many people who work in the public sector may find their contract protects them in the event of illness or disability.

Finding a balance

Laura Shanks is keen to point out that when selling these products the adviser must work out what is affordable.

She says: 'Traditionally, when someone is selling income protection they say, '55% of your present salary will cost this much to insure', which can work out quite expensive and put the client off. If you break it down into what the client needs to insure and look at costs such as mortgage payments and utility bills, it can be much more affordable and the client is much more likely to buy. Obviously it can be upgraded at a later date as circumstances change.'

The general consensus is that IP and CI are the first ports of call for young singletons. But what about life cover? Some advisers have seen this as a growing sector.

Frank Cochran, managing director of FSC Investment Service, says: 'One thing I see more and more is young people coming to me and taking out life insurance, because it is never going to be as cheap as when they are young and fit. They are buying it with the future in mind, for a mortgage or family, as cheap as they can. With that they can have bolt on critical illness cover, bolt on disability cover and bolt on permanent disability benefit.'

So, life cover can be used as the main plank of an insurance strategy, but obviously the cost of what is not an essential product in the present sense must be borne in mind.

Brian Lentz agrees there are benefits to buying life assurance before the need becomes apparent.

'Although life insurance is only really a necessity if there are beneficiaries, I do not agree with those who say single people do not need life cover. Nobody knows what your health will be in the future, and in some cases when you do need life cover your health has altered, and the cover is no longer available or is too expensive,' he says.

If there is a mortgage involved then life cover is an obvious starting point, but with many lenders no longer making this mandatory, could a young person's more immediate mortgage protection needs be met by MPPI?

Howard Horne, principal of Howard Horne Associates, is not a fan. 'If there is a mortgage involved then there should be some life cover, but as for MPPI, it is ruinously expensive and the cover is pathetic. For the price of an MPPI policy you can have a decent income protection policy,' he says.

Saunders firmly believes if there is a permanent demand on a person's income, then the importance of protecting that income increases. She believes this should be done through IP rather than MPPI.

'I do not like MPPI as it is a lot of money for what is in effect a temporary solution. If the reason you cannot work is a long term one then all it does is mean that a problem is delayed. The statistics are low but it does happen, I am amazed that people do not think it is a priority,' she says.

Both advisers and providers make the point that it is important the adviser works with the client to assess their circumstances, as they are in the best position to decide what to prioritise. According to advisers, some clients can seem like straightforward cases until they take a look at the family medical history and the likelihood of contracting a serious illness.

Young, single people should consider protecting their income, as few can live without it. They can also reap more benefits if they look at adding CI. The fact they are young makes this cover cheap and yet, conversely, they have the greatest time span in which to become seriously ill.

The general impression of MPPI is not good and would be top of few people's list. The benefits of having life assurance at a young age when there are no dependents are also not immediately obvious.

However, the more protection clients have in place, the stronger their safety net will be. How much protection young clients want to invest in depends on how far into the future they are willing to look.


Cover notes

• Income protection is potentially the most important type of protection young, single people should have in place.

• Income protection costs can be reduced by only covering essential commitments.

• Offering short-term cover only, MPPI is considered too expensive.

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