Risk Management

Will your nest egg go the distance?

Not many will admit it, or even be aware of it, but some clients are becoming increasingly concerned about their retirement. Will they have enough income? How long will their capital last? How long are they going to live? Perhaps a client’s father may have already had a heart valve replacement, and his mother might be on three types of chronic medication. Although they are still “going strong”, the same cannot be said about their bank balance. Your clients may also be heading there. Except in their case, they are likely to live even longer, as medical technology continues to improve.

As if it isn’t difficult enough to save sufficiently for retirement, there is also the matter of spiralling health care costs. When last did your clients’ medical savings accounts last them the entire year? When last did they upgrade their medical aid? Chances are that you actually had to help them downgrade, as medical aid contributions have continued to outpace normal inflation – and their salary increases. If affordability is a problem now, how bleak will this picture be during retirement? And, with only a bare-boned medical aid to cover them, the prospect of either a hospital event wiping out a big chunk of their capital, or day-to-day expenses chipping away at their monthly budget, looms large.

All of this highlights the need for critical illness benefits and, importantly, how it should form part of your clients’ retirement planning. It is time to change the mindset of viewing life insurance as short-term insurance, always going for the lowest possible premium due to the perception that a policy only stays on the books for a short period. Replacing risk benefits every two years or so invariably only leads to one thing: unaffordable premiums when your clients need it most – in their old age, because the cost of new cover increases as one gets older.

A critical illness benefit (ideally with a level premium pattern) should form an integral part of one’s retirement planning, as it helps protect your capital from being eroded by a medical aid shortfall or other short-term expenses. However, conventional critical illness benefits are not ideally suited to protect clients against the long-term impact brought about by some illnesses, such as the long-term care of a spouse with Alzheimer’s disease or a spouse who is paralysed in an accident. Critical illness benefits are relatively expensive, so to purchase a benefit substantial enough to provide for an ongoing expense that may continue indefinitely may be an unaffordable option for most of your clients.

A more affordable solution would be to consider a functional impairment benefit, in combination with a critical illness benefit. This way, the critical illness benefit only needs to cater for short-term expenses, while the more cost-effective impairment benefit can take care of the long-term expenses. There are still two problems, though. One: since you do not know for how long your client is going to live, how do you know how much impairment cover is enough? Two: functional impairment benefits are not whole of life benefits. They typically cease at age 65 or 70.

Fortunately, other solutions are emerging to help protect clients against the risk of outliving their capital. To take away the guesswork of how much cover is enough, the Functional Protector offered by Momentum Myriad pays a monthly benefit for whole of life should the client become severely impaired. Similarly, Myriad’s Longevity Protector – Critical Illness makes ongoing payments every five years in the event of a moderate to severe critical illness that has a long-term impact on lifestyle. It also has a feature whereby 20% of the benefit amount is paid should a client reach age 80 without having claimed under his critical illness benefit.

For clients who are facing the challenges of spiraling health care costs and increasing longevity, these are important innovations. Risk products can add extra mileage to a client’s retirement savings and can do so in a cost-effective manner – because every penny counts.

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