Why young people need to take cover

Income protection insurance, critical illness cover and life insurance are perhaps not the most popular search terms in TikTok and Instagram. But we believe they could be worth exploring for youngsters for many reasons, not least because insurance premiums are cheaper for people in early adulthood.

They could also be worth exploring by parents, who may be keen to ensure their offspring are well protected and are happy to pay insurance premiums on their children’s behalf. After all, illness or serious injury can strike any time. And, as we show below, statistics show a significant proportion of young women have faced mental illness, impacting their ability to work.

It could be prudent to examine options for all three of these types of protection. But which might suit a young person’s needs would depend on their overall financial circumstances.

Income protection

If you’re in the early stage of adult life, then you will probably focus on building your career and establishing financial independence. Income protection insurance could ensure your regular spending needs and rent payments are covered should you suffer a serious illness. So it could form a key part of your financial planning if you’re starting out in your career.

If you are unable to work for medical reasons, the insurance pays a monthly replacement income, tax-free, ensuring regular outgoings can be paid. Typically, the payments are made until you return to work although, dependent on the severity of the illness or injury, some policies could last until retirement. There are often options to reduce the age up to which the policy applies, to secure a lower premium.

In the UK statutory sick pay is £109.40 per week and available for up to 28 weeks (1). But with income protection policies, you can typically expect to receive between half and two-thirds of your earnings before tax.

There is normally a minimum wait of around four weeks from the point of stopping work before you start receiving payments. But the longer you can wait before making a claim, the cheaper your premium will generally be.

The high incidence of mental health problems among young women is shown by data from mental health charity Mind. This reveals that more than a quarter (26 percent) of women aged between 16 and 24 report having a common mental health problem in any given week (2). Separate figures from the Office for National Statistics reveal that mental health was among the top three sicknesses cited most frequently for work absence in 2022 (3).

Income protection has a role to play against this societal backdrop. But, as with all such policies, disclosure of pre-existing medical conditions is vital to ensure you are successful in getting a payout should you come to claim.

Life insurance

Life insurance falls into two broad categories: whole-of-life and term insurance. The former involves an insurance payout whenever the policyholder dies, while term cover pays out if they die within a specified period.

A subject unlikely to feature among young adults’ priorities, life insurance can be invaluable if you’re aged between 20 to 30, as counter-intuitive as that may sound.

First, if someone in their twenties has a young family and one or more dependents, life insurance could ultimately be a financial lifeline for them should the worst happen.

Second, it’s cheaper at this age. Premiums often start at around £5 a month for those in their twenties and often increase if people wait to buy it in their thirties.

A cost-effective option is decreasing term life insurance. This is often used to cover mortgage payments, where the payout sum reduces annually until it reaches zero at the end of the mortgage term.

In recent years, some life insurers have bolstered their packages with benefits targeting a younger demographic. These could include gym membership, private GP access and spa breaks to reward healthy lifestyles, or free cinema tickets.

Critical illness insurance

Critical illness cover can be bought as an ancillary cover with life insurance, or as a standalone policy.

This cover pays out a tax-free lump sum if the policyholder suffers from one of a set of illnesses specified in the policy. Combining critical illness with income protection can help ensure a mortgage continues to be paid in the face of long-term illness, which could provide comfort to young first-time house buyers.

Often, critical illness policies cover a core list of illnesses and events, including types of cancer, a heart attack or a stroke. Some critical illness products also pay out if the policyholder becomes permanently disabled as a result of a condition listed in the policy.

The amount an individual will pay will be determined by factors such as medical history, age, financial situation, occupation and the size of the lump sum they want to be covered for. As with life insurance, it’s typically cheaper to purchase this cover as a young adult.

Financial planning can be just as important for young people as it is for older people, and protection has a key role to play here. In fact, with almost an entire lifetime ahead of them, young people could potentially reap a longer-lasting benefit from protection than someone approaching retirement.

Sources:

1. Gov.uk, ‘Statuary Sick Pay (SSP): employer guide’, 22 January 2024.

2. Mind (www.mind.org.uk), ‘Mental health facts and statistics’, 22 January 2024.

3. Office for National Statistics (www.ons.gov.uk), ‘Sickness absence in the UK labour market: 2022’, 26 April 2023.