redefining income protection in the 21st century june 2011
DESCRIPTION
When it comes to retirement 67 is the new 55! A fundamental shift is underway. Life expectancy is rising and as a result countries everywhere are raising the retirement age. A new life stage is emerging between midlife and retirement. In this new era conventional solutions will fall short. A new mindset to income protection is required.TRANSCRIPT
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Redefining income protection in the 21st century
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Agenda
• Living longer working longer
• Life expectancy of the disabled
• Financial planning implications
• Unique Myriad solution
• Opportunities
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Many of us have been sold an unrealistic vision of retirement
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But most of us cannot afford to spend a third of our lives on holiday
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The history of retirement
• A relatively new concept
• Work-until-you-die model until late 19th century
• In the 1880’s, more than 75% of men over 64 still worked
• Half of 85-year olds still worked
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The history of retirement
• Retirement invented in 1898 by Otto von Bismarck
• Made possible by the move from farm to factory
• Retirement age was 70, well beyond the average life expectancy of 44 then
• Changed in 1925 to 65
• Has not changed despite increase in life expectancy
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Life expectancy at 65
Life expectancy at 65, male, years 1940 2007
France 9.90 18.15
Britain 10.84 17.40
United States 11.94 17.52
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Increasing life expectancy the main threat to
comfortable retirement.
What are we to do?
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Experts agree that the only solution to a comfortable
retirement is to work longer.
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Longevity’s impact on required savings
• Retire at 75% of income at age 65
• Impact if you live past age 80
Starting age Required savings as % of income
Until 80 Until 85 Until 90
25 12.5% 15% 20%
35 20% 25% 30%
45 35% 45% 50%
Further assumptionsInflation 5%Net investment return 8%Salary and RA contribution increases 5%
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Replacement ratio
• Is 75% appropriate?
• Children out of the house, no savings, no debt?
• U-shape spending profile
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Impact if you retire later
• Retire at 75% of income
• Live until age 85
Starting age Required savings as % of income
Retire age 65 Retire age 70
25 15% 7%
35 25% 15%
45 45% 25%
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Why not save more or start sooner?
• Low starting salary, student debt, save for house deposit
• Defer gratification? Good luck!
• Many prefer liquidity
• Alex Forbes: 70% take cash before retirement
• Compound interest’s flipside: inflation
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We just don’t want to listen!
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Working longer - the double-whammy solution.
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Retirement age trends
• Early retirement trend is being reversed
• Rich countries have no choice but to raise the retirement age
• Social security, pension deficits
• Falling support ratio
• Retirement age heading towards 70
• Trend should spill over to South Africa
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Hiring granny
• Knowledge-based economy
• Healthier bodies
• Animal spirit still there 55-64s launched more businesses than 20-34s
• Advantages of older employees Decades of experience and knowledge Repositories of company values People skills Lower levels of absenteeism
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Stats, expectations, predictions
• 1/3rd of Americans pursue second career after retirement
• Half expect to work until their 70s
• Number of workers aged 65 and over predicted to soar by 80% by 2016
• South African labour force participation rate of males 65+ 1997: 10% 2007: 32%
• Boom in SMEs
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“A new life stage is emerging between midlife and retirement”
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Irving Kahn, 105 and Helen Reichert, 109Brother and sister from New York City; Kahn goes to his financial-services office daily, and Reichert enjoys movies. A recent favourite:Iron Man.
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Miems Swanepoel, 76, CEO MADventure, Cape TownTries something new every 5 years. Going hiking in the Peru next year
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The solution: work longer
Live longer
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But what if?
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Case study
• Kelly earns R20 000
• She starts saving 15% from age 30
• Life expectancy at 70 in 2050: 100 years
• If she works until age 75, she will receive 75% of her salary if she lives until 100
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Case study (continued)
• She insures 100% of her income up to age 65
• If she becomes disabled, she will only receive 50% of her salary after age 65 (assuming she lives until age 90)
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Life expectancy of the disabled
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Life expectancy of the disabled
• Some disabilities have little impact on life expectancy, e.g. Limb impairments Spinal cord injuries
• These injuries typically accident related (⅓ rd of Momentum’s claims)
• Other disabilities are as a result of illness And are impacted by medical technology Life expectancy improves daily
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Major claim causes
• Musculoskeletal 36%
• Mental and behavioural 13%
• Cancer 11%
• Cardiovascular 10%
• Other 30%
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Likelihood of survival to age 75
Age 75
Healthy 86%
Musculoskeletal 79%
Mental and behavioural 68%
Cardiovascular 63%
Cancer 28%
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Likelihood of survival
Age 75 Age 80 Age 85 Age 90 Age 95
Healthy 86% 79% 71% 60% 48%
Musculoskeletal 79% 71% 60% 47% 33%
Mental and behavioural 68% 56% 42% 28% 15%
Cardiovascular 63% 54% 41% 26% 14%
Cancer 28% 25% 21% 17% 12%
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Becoming disabled in an era of exponentially increasing longevity may be your biggest financial risk.
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Financial planning implications
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How long do you assume your clients will live with a disability?
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How much should your disabled clients withdraw from
their capital annually?
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How do you ensure that clients are protected against the risk of
outliving their capital?
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Are lump sums still appropriate considering the long term need?
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Are lump sums still appropriate?
• The money illusion: Millionaire vs middle class
• Client may go on a spending spree
• Even if not…
• For the same premium as an Income Protector, how long will a lump sum last you?
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Are lump sums still appropriate?
• Case study: 40 year old male non-smoker, best rates Income of R40 000 Insures 75% of income to age 65 IP premium is R630 Same premium could buy lump sum cover of R3.9m If invested, lump sum will only get the client half way to
retirement!
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Settling debt
• Lump sum vs. income
• Lump sum advantage – no further interest payable
• Still a place in financial planning
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The problem with the conventional way
• 100% replacement only up to age 65
• Extra working years lost
• Selection risk cause insurance to lag the trend
• Conundrum: disabled client may have to rely on their own capital for decades after income protection payouts cease
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Unique Myriad solution
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Why Myriad?
• Comprehensive lump sum solutions
• Market-leading income protection benefits 100% solution on temporary and permanent disability Best of sickness and loss of income Built-in impairment and illness events Partial claim upgrade Claim increase booster
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Why Myriad?
• Market share
• Claims success stories
• Launch of the Longevity Protectors
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Longevity Protector case study 1
John, age 35, takes out an Income Protector of R22 500 with a 5% benefit increase.
R6 million*
R6 million*
Claim R22 500 pm
Age 35*Five yearly payouts in real terms as at age 65
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Longevity Protector case study 2
R200 000 in real terms
R200 000 in real terms
Claim R1 million
Age 35
John, age 35, takes out Death Benefit and Comprehensive Disability Benefit of R1 million with a 5% benefit increase.
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“10% extra premium extends income protection by up to
25 years”
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Opportunities
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Opportunities
• Use income benefits for long term, lump sums for once off
• Extend expiry age to age 70
• Longevity protection