Redefining income protection in the 21st century

Agenda

• Living longer working longer

• Life expectancy of the disabled

• Financial planning implications

• Unique Myriad solution

• Opportunities

Many of us have been sold an unrealistic vision of retirement

But most of us cannot afford to spend a third of our lives on holiday

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

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

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

Increasing life expectancy the main threat to

comfortable retirement.

What are we to do?

Experts agree that the only solution to a comfortable

retirement is to work longer.

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%

Replacement ratio

• Is 75% appropriate?

• Children out of the house, no savings, no debt?

• U-shape spending profile

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%

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

We just don’t want to listen!

Working longer - the double-whammy solution.

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

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

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

“A new life stage is emerging between midlife and retirement”

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.

Miems Swanepoel, 76, CEO MADventure, Cape TownTries something new every 5 years. Going hiking in the Peru next year

The solution: work longer

Live longer

But what if?

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

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)

Life expectancy of the disabled

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

Major claim causes

• Musculoskeletal 36%

• Mental and behavioural 13%

• Cancer 11%

• Cardiovascular 10%

• Other 30%

Likelihood of survival to age 75

Age 75

Healthy 86%

Musculoskeletal 79%

Mental and behavioural 68%

Cardiovascular 63%

Cancer 28%

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%

Becoming disabled in an era of exponentially increasing longevity may be your biggest financial risk.

Financial planning implications

How long do you assume your clients will live with a disability?

How much should your disabled clients withdraw from

their capital annually?

How do you ensure that clients are protected against the risk of

outliving their capital?

Are lump sums still appropriate considering the long term need?

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?

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!

Settling debt

• Lump sum vs. income

• Lump sum advantage – no further interest payable

• Still a place in financial planning

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

Unique Myriad solution

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

Why Myriad?

• Market share

• Claims success stories

• Launch of the Longevity Protectors

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

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.

“10% extra premium extends income protection by up to

25 years”

Opportunities

Opportunities

• Use income benefits for long term, lump sums for once off

• Extend expiry age to age 70

• Longevity protection