Young singles – imagine a 22-year-old a few years into their career who can’t yet afford a deposit for a home – are not typical advised clients. Though as volumes of articles promoting intergenerational planning have suggested, they could (and perhaps should) be.
In this series, we examine the various protection needs of consumers as they travel through life’s many stages. And, starting with young singles, we plan to show that protection is important throughout.
Paul is a hockey-loving, 23-year-old graduate, pretty happy to have secured his first job as a legal executive on a salary of £24,000 per year.
He is currently saving £100 per month towards a deposit for his first home, though he has no safety net.
In fact, Paul has no awareness of protection at all and is fairly confident the State will provide if he is unable to work for any reason - he heard that somewhere. And Paul feels even more secure when he learns he is entitled to one month’s full pay during sickness. It’s only a month as he’s new to the role.
Paul says the State will look after him. So let’s look at Paul’s circumstances*, without any protection in place, should he be unable to work due to illness or injury.
For the first 28 weeks, he would be entitled to Statutory Sick Pay at a rate of £94.45 per week. Not much, and certainly not enough to support his current lifestyle.
After this period is up, Paul would move onto Employment and Support Allowance (ESA), which offers financial support while he is unable to work and personalised help so that he can work again once he is considered able to.
So how much is this? For the first 13 weeks of ESA, Paul would be in what is called the ‘assessment phase’, where the rate payable is just £57.90 per week (over 25s get a little more). During this time, Paul would be assessed on the extent of his disability and what work, if any, he could do.
Once this phase concludes, Paul would be placed into one of two groups: a work related activity group (for those capable of doing some form of work with the right assistance), at £86.95 per week, or a support group (for those unlikely to ever return to work), at a slightly inflated £96.45 per week.
Paul may need extra protection.
One possible solution
Let’s consider Paul’s choices.
Firstly, does Paul need life insurance? Probably not. In fact, income protection and critical illness may be considered far more important for a single person with no dependants, income protection in particular.
Using the Zurich maximum benefit calculation (80% of net earnings), Paul could receive a benefit of £1,313 per month (with a termination age of 60), at a cost of about £25**. Remember, if Paul can’t work due to illness or injury, he would currently only get one month full pay, so he would need a four-week deferred period.
And though a two-year limited claim period is available, it may be more prudent for Paul to consider the full claim period version. After all, it’s a long way to go until retirement and anything could happen.
Finally, we ought to consider indexation to make sure the income benefit keeps up with inflation and salary rises.
By itself, that would do a good job for Paul. But could we do more?
What if Paul fell through the gap, so to speak, and suffered an injury or illness that wasn’t an income protection claim, but would have been successful with a critical illness policy?
An example of this may be a mild heart attack which didn’t ultimately require much time off work where the income protection policy either didn’t pay or did for only a short period. (It could go the other way, of course, where a ‘young singles’ client had a critical illness policy but suffered an injury or illness which warranted an income protection claim). Perhaps we can provide Paul with both types of cover.
Bearing in mind that Paul is single, standalone critical illness may be appropriate, but that’s hard to find and can be dearer than a life and accelerated critical illness policy. So the reality is that, while Paul doesn’t really need life cover, he will be getting some anyway by taking out an accelerated policy. The good news is that he won’t have a survival period to get through should he need to make a claim.
How much cover?
Note: the following figures are based on a quote completed on the Zurich system on 11 February 2019.
In terms of cover, you could suggest £100,000 of life or earlier critical illness (level sum assured, to age 60), which comes in at just over £20 per month. For an extra £4 per month, hockey fan Paul could add fracture cover, which would pay between £2,000 and £6,000 for each fracture, Achilles tendon rupture, or cruciate ligament tear in the knee, with a maximum of £6,000 in any one policy year.
So, all in, for just over £50 per month, Paul could have income protection, critical illness, and fracture cover - plus some life insurance. Maybe Paul could consider using some of the £100 per month he is saving for his house deposit to protect himself and his income? Or maybe parents or grandparents could be persuaded to use some of their £3,000 annual gift allowance to pay the premiums for Paul? What better birthday gift is there?
Young singles may not be traditional target clients for many advisers. But if a young single person is visiting a mortgage adviser to discuss the possibility of securing a mortgage, or an existing older client has children or grandchildren who fall into this under-insured group, the opportunities for advisers are there.
Next time, we will take a look at the protection needs of those at another crucial life stage: young couples without children.
*Figures are based on the State benefits payable from April 2019.
**Based on a quote completed on the Zurich system on 11 February 2019 (to age 60, full claim period, indexed at 3%)
Richard Smith is a protection specialist at Zurich