Skip that latte, cover your life

Mil­len­ni­als tend to ig­nore the need to start sav­ing young

Sunday Times - - Money - By CHAR­LENE STEENKAMP

● Mil­len­ni­als are more likely to take out ex­pen­sive travel and cell­phone in­sur­ance than life as­sur­ance, but the sin­gle big­gest risk they face is their in­abil­ity to earn an in­come if they are dis­abled in an ac­ci­dent or con­tract a se­vere ill­ness such as cancer.

A Dis­cov­ery Life study es­ti­mates that of the 145 000 grad­u­ates en­ter­ing the job mar­ket at the end of this year, about 3 900 will die, suf­fer a dis­abil­ity or con­tract a se­vere or crit­i­cal ill­ness be­fore the age of 35.

Ac­cord­ing to the study, en­ti­tled “Mil­len­ni­als at Risk of Un­derin­sur­ance”, peo­ple born be­tween 1981 and 1996 col­lec­tively have a short­fall of R15-tril­lion in life cover.

Iron­i­cally, the cost of life, dis­abil­ity and se­vere ill­ness cover is much cheaper than travel, cell­phone and other forms of short­term in­sur­ance, ac­cord­ing to the study.

For the young and rest­less

And the ear­lier you take out cover, the cheaper it is over time. For ex­am­ple, if you took out life as­sur­ance when you were 25, by the time you turned 30 you would be pay­ing a premium of R270 per R100 000 of cover.

But if you took out the same amount of cover for the first time at the age of 30, you will pay R310 per R100 000 of life cover, says Gareth Fried­lan­der, the head of re­search and de­vel­op­ment at Dis­cov­ery Life.

The monthly premium will es­ca­late the later you take out cover — for ex­am­ple, if you took out life cover at 25, by the time you are 50 your premium would be only R470 per R100 000 of life cover, com­pared with some­one who takes out cover for the first time at 50, who would pay R1 320 per R100 000 of life cover, Fried­lan­der says.

As a young work­ing per­son who has just em­barked on a ca­reer, with no de­pen­dants and with your first few salary cheques in hand, you may think you have bet­ter ways to spend your money.

Some of those may be quite jus­ti­fi­able, such as tak­ing care of your par­ents or pay­ing off your study loans.

How­ever, here are six com­pelling rea­sons you need to find space in your bud­get for life and risk as­sur­ance in your 20s:

Pro­tect your earn­ing po­ten­tial

If you are be­tween 19 and 30 years old, your sin­gle big­gest risk is los­ing the abil­ity to earn an in­come when you are at the start of your work­ing ca­reer. Es­sen­tially, you are de­pen­dent on a life­time of earn­ings, which is un­der threat if you should be­come per­ma­nently dis­abled.

Ac­cord­ing to the Dis­cov­ery Life study, if you are a 25-year-old pro­fes­sional earn­ing R20 000 a month, the cur­rent value of your ex­pected fu­ture in­come is about R47-mil­lion. To put this into per­spec­tive, the value of your fu­ture in­come at age 25 is 2.5 times higher than the fu­ture value of the in­come of some­body at the age of 45.

Last year, per­ma­nent dis­abil­ity claims to Dis­cov­ery Life made up a stag­ger­ing one­sev­enth of all the monthly dis­abil­ity in­come ben­e­fits paid to 18- to 30-year-olds, which shows that a life-chang­ing event is a real pos­si­bil­ity.

Risky be­hav­iour

Young adults are more likely to en­gage in risky be­hav­iour that can lead to death or in­jury.

For ex­am­ple, 88% of all deaths be­tween 2014 and 2016 for mil­len­ni­als who had life cover with Dis­cov­ery Life were due to risky be­hav­iour, such as car ac­ci­dents.

Re­search shows that young peo­ple are the heav­i­est drinkers and con­sume 90% of their al­co­hol in­take in binge-drink­ing ses­sions.

Dis­cov­ery Life sta­tis­tics also in­di­cate that the fa­tal­ity rate for ve­hi­cle ac­ci­dents in­volv­ing young adults is 60% higher than the av­er­age of all other ages com­bined.

Lack of mean­ing­ful sav­ings

If you do not have sig­nif­i­cant sav­ings, you will not have money to fall back on if you suf­fer a fi­nan­cial shock or life-chang­ing event, and this will also se­verely af­fect your re­tire­ment pro­vi­sion.

Fried­lan­der says only 35% of South African mil­len­ni­als are sav­ing for the long term and a stag­ger­ing 46% of mil­len­ni­als have no sav­ings at all.

A re­cent sur­vey found that al­most half of

Mil­len­ni­als pre­fer not to be for­mally em­ployed and start sav­ing for re­tire­ment late in their lives

Khaya Go­bodo

Old Mu­tual In­vest­ment Group

South Africans aged be­tween 18 and 34 to­day have spent more of their hard-earned money on cof­fee than on any form of re­tire­ment in­vest­ing.

Old Mu­tual Unit Trusts re­search shows that mil­len­ni­als “pre­fer not to be for­mally em­ployed and start sav­ing for re­tire­ment late in their work­ing lives; they don’t have struc­tured sav­ings; they don’t pre­serve their sav­ings; they switch in­vest­ments, in­cur­ring trans­ac­tion costs along the way; and they will live longer than any other gen­er­a­tion,” says Khaya Go­bodo, the MD of as­set man­age­ment at Old Mu­tual In­vest­ment Group. “It’s go­ing to be cat­a­strophic,’’ he says.

Over­bur­dened with debt

Mil­len­ni­als also have loads of debt, and while some of it makes sense in this age group, much of it is debt used for fund­ing a lifestyle rather than build­ing wealth.

At this age, you may have stu­dent debt, and the high­est debt might be on a re­cently pur­chased home, but 70% of South African mil­len­ni­als have per­sonal loans, 42% are pay­ing off a car, 27% are pay­ing off a credit card and 21% are pay­ing off an over­draft — debt that prob­a­bly funded con­sump­tion, the re­search found.

If you don’t have mean­ing­ful sav­ings and have no life cover, but you have a lot of debt, you and your fam­ily face hav­ing no means to pay off your debts should you die or be­come dis­abled and un­able to earn a liv­ing.

This makes life as­sur­ance and dis­abil­ity cover, con­trary to pop­u­lar be­lief, a crit­i­cal com­po­nent in the fi­nan­cial plan of mil­len­ni­als, says Fried­lan­der.

Parental re­spon­si­bil­i­ties

In South Africa, there is a ris­ing trend of par­ents de­pend­ing on work­ing chil­dren, which means newly em­ployed, sin­gle young adults al­ready have de­pen­dants, Fried­lan­der says.

One rea­son for the grow­ing trend of parental de­pen­dency is longevity, which in­creases not only the chances of hav­ing to sup­port a par­ent, but the length of time a par­ent may de­pend on you. In 1900, 5% of peo­ple in their 60s had a liv­ing par­ent, while to­day the pro­por­tion is closer to 50%.

In 2016, 58% of young adults said they ex­pected to sup­port their par­ents in the fu­ture.

Fried­lan­der says sup­port­ing par­ents hin­ders your pro­vi­sion for your own re­tire­ment and in­creases the amount of life and dis­abil­ity cover you need.

In­creased fo­cus on health

Mil­len­ni­als are more health con­scious than pre­vi­ous gen­er­a­tions and are there­fore likely to live longer. Sta­tis­tics from Dis­cov­ery’s Vi­tal­ity well­ness pro­gramme, for ex­am­ple, show those who reach the higher sta­tus of Gold and Di­a­mond have an es­ti­mated av­er­age life ex­pectancy of 87.4 years — higher than the av­er­age in the coun­try with one of the high­est av­er­age life ex­pectan­cies in the world, Ja­pan.

The in­creased fo­cus on health and well­ness, and ad­vances in med­i­cal tech­nol­ogy, are ex­tend­ing longevity, which means that mil­len­ni­als are now fi­nan­cially ex­posed for a longer pe­riod of time, Fried­lan­der says.

Pic­ture: Jackie Clausen

Young peo­ple, who as a group are more likely to in­dulge in risky be­hav­iour, should find space in their bud­get for life and risk as­sur­ance be­fore they turn 30.

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