Switch to DC funds leaves mem­bers un­der­in­sured

Weekend Argus (Saturday Edition) - - PERSONALFINANCE -

One of the ma­jor rea­sons that so many South Africans have too lit­tle risk life as­sur­ance is the con­ver­sion, dur­ing the 1980s and 1990s, of re­tire­ment funds from de­fined ben­e­fit (DB) funds to de­fined con­tri­bu­tion (DC) funds.

Most DB funds as­sured their mem­bers for a fixed amount of cover based on a mul­ti­ple – an av­er­age of two or three times – of their an­nual pen­sion­able salary. If a mem­ber died be­fore re­tire­ment, the mem­ber’s spouse would re­ceive a pen­sion cal­cu­lated mainly as if he or she had been a fund mem­ber from the date of em­ploy­ment un­til the nor­mal age of re­tire­ment.

In the DC en­vi­ron­ment, the non­mem­ber spouse will re­ceive only the amount of money saved, plus in­vest­ment re­turns, and then an as­sured amount as a mul­ti­ple of the fund mem­ber’s salary. So if you, the fund mem­ber, die rel­a­tively young, be­fore you have ac­cu­mu­lated much in the way of re­tire­ment sav­ings, the life as­sur­ance com­po­nent, as a mul­ti­ple of your salary, will not be enough to meet the needs of your depen­dants.

On the flip side, a fund mem­ber who is ap­proach­ing re­tire­ment will need very lit­tle life as­sur­ance cover.

Re­tire­ment fund mem­bers are now be­ing of­fered prod­ucts that al­low them to choose, above a min­i­mum amount, how much of their re­tire­ment fund con­tri­bu­tions must be al­lo­cated to re­tire­ment sav­ings and how much to life as­sur­ance; or they are be­ing of­fered prod­ucts that pay a much higher ben­e­fit (say, eight times their an­nual pen­sion­able salary) when they are young, and the ben­e­fit de­creases to one times their salary as they near re­tire­ment.

But group cover that pays a mul­ti­ple of salary re­mains largely the norm, so fund mem­bers, par­tic­u­larly those with depen­dants, must en­sure that their own risk cover will make up for any short­fall.

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