How to choose the right protection

For many, this is also the beginning of establishing a relationship with their financial adviser.

Mark Cracknell, head of protection distribution at Aviva, observes: “There are key points at which people buy protection which is when they take a debt, so that’s normally a mortgage; when they have children, so they have liabilities; and to protect wealth; and against death, so inheritance tax.”

But for a lot of millennials, the prospect of ever being able to save enough to buy a property seems rather distant, yet they may already have dependents and decide they would like to take out some form of protection.

Without having a financial adviser, they may be confused about how to go about it. 

Is it possible to research and buy the right protection plan online? Or should millennials go down the advice route?

You might not need to use an adviser if you do your homework and suss out exactly what you need to buy, but it could be useful to consult an adviser who specialises in protection.Iona Bain

There is often a perception that using an adviser will cost more and involve face-to-face advice, while millennials are likely to be more familiar with buying most things, including other types of insurance, online.

However, this is likely to be their first foray into protection and an online search may just confuse the matter.

Iona Bain, founder of the Young Money Blog, suggests: “You can keep costs down by buying in good health and using an online insurance broker to compare quotes. 

“You might not need to use an adviser if you do your homework and suss out exactly what you need to buy, but it could be useful to consult an adviser who specialises in protection, as they can take you through various policies and help you pick the right one.”

Cheap and not so cheerful

Emma Thomson, life office relationship director at LifeSearch, says: “There are lots of ways to compare prices but it’s mainly life and critical illness cover that’s available to buy online. 

“Like with most things in life, you get what you pay for, so we recommend you speak to an independent adviser to find the best cover for your circumstances and budget, as cheap cover is not necessarily good value cover.” 

She acknowledges: “Speaking to an adviser doesn’t haven’t to be daunting or onerous, and some firms are available in evenings and weekends too.”

For advisers with a client in the millennial age bracket, often defined as those born between the early 1980s and early 1990s, how should they approach finding the best protection plan for their clients?

Craig Brown, director, intermediary at Legal & General, notes that recent market and technological developments mean there are numerous ways to find the right protection for clients. 

“Deciding on how to shop around will depend on personal choice. However, it’s crucial that consumers get professional advice, unless they know exactly what they need and they understand all the technical terminology,” he cautions. 

Millennials who are looking into a protection policy without the help of an adviser may be tempted to choose the cheapest option which suits their current lifestyle choices.

But as Mr Brown says: "Advisers will be able to assess the individuals' lifestyle and the risks involved, as well as use their industry expertise to review the market for the best product and provider that best suits the customer’s own requirements.”

Choosing income protection, critical illness cover or life insurance through an adviser also means a wider range of providers to choose from.

Easy to adapt

Most people, once they have started paying monthly for a protection plan, will want it to continue to meet their changing needs throughout the rest of their life.

This is where an adviser can help steer younger clients towards a protection policy that might adapt along with their lifestyle choices.

When thinking about protection, it is crucial to shop around and think long term, according to Old Mutual Wealth’s head of protection, Paul Roberts.

“A protection policy will only become more important as people get older and so it’s crucial millennials don’t just buy for today, but buy for life,” he says, noting cover should set them back by approximately just £20 a month.

“However, as they get older they need to continually engage with their cover as their lifestyle changes,” suggests Mr Roberts. “For instance, if they get a partner or have children they may need to increase their cover. 

“It’s important for younger clients to look for plans that can be adapted and have good increased options so it continually fits with their lifestyle.”

Figure 1: A policy quote for 'Mr Millennial' combining critical illness and life cover.

Source: Old Mutual Wealth

Tom Conner, director at Drewberry Insurance, agrees the cost of a protection policy does not have to be very high and going via a financial adviser may actually help keep costs down, particularly if the client has a specific budget. 

“Deciding which cover is best and understanding how to make the most of your budget also impacts people of all ages, so speaking to an adviser, which is unlikely to cost more than going direct (and may even be cheaper) remains the best way for most people,” he explains. 

He says many clients who seek financial advice end up with something quite different from what they thought was the best solution at the start, even when the price of the policy is around £10-20 per month.

“Protection is cheaper when you are young because it increases in price as you get older, but premiums can be fixed at the time of buying cover,” Mr Conner adds.

Stephen Crosbie, protection director at Aegon, warns there may be higher premiums for those with certain health and lifestyle choices, however.

“The price is higher for those people with aspects of their health or lifestyle that increase the likelihood of a claim, such as smokers, heavy drinkers, people with existing health conditions, adverse family history or those that undertake dangerous pursuits,” he notes.

Monthly premiums are generally cheaper, the younger the policyholder is, than it would be for someone who took out protection for the first time in their 50s.

Delaying protection decisions

But what does delaying buying cover mean in terms of cost?

Old Mutual Wealth calculated two quotes based on an individual working to 65 earning £800,000 over the lifetime. 

One is a 25-year-old with a 40-year term and the other is a 45-year-old with a 20-year term. 

Mr Roberts explains: “It shows that even though the term is half what it was at the younger age, the premiums increase from £29.92 to £85.60. 

“Cumulatively, by taking a policy out to retirement at age 25 would cost £14,361.60 and delaying it to age 45 would cost £20,544.00. So, they’ve missed out on 20 years of cover and it has cost them approximately an extra 30 per cent.”

Figure 2: Life cover quote for a 25-year-old with a 40-year term

Figure 3: Life cover quote for a 45-year-old with a 20-year term

Source: Old Mutual Wealth

Paul Yates, product strategy director at iPipeline, acknowledges it is really difficult to work out the right product type, product and cover amount. 

He thinks the need for advisers to help millennials with this decision will become more important.

Mr Yates notes: “With the move for traditional protection triggers - house purchase and birth of children - occurring later, the importance of IFAs and brokers to provide this advice has never been greater.”

eleanor.duncan@ft.com