If there's one form of insurance that single millennials should not do without, it’s income replacement cover, which pays a monthly income if you become disabled. And yet there is relatively low take-up of this type of insurance by this demographic.
Research shows that younger millennials who have entered the workforce but who have not yet started a family are prone to risky behaviour, such as binge drinking and late-night driving. But they appear not to recognise the importance of protection against permanent disability.
If you have recently started work, have you given any thought to what you would do if you were involved in a car accident and disabled as a result, to the extent that you could no longer earn a living? Who would look after you? Whoever took on that role would bear a huge financial burden, because your living costs would probably include high medical expenses, so you would require more than what you were earning.
You probably have a certain degree of cover through your employee benefits package (which typically includes pension benefits and group life and disability cover). But such cover is likely to fall far short of what you would need, particularly if you have a career’s worth of salary cheques in front of you that you have now lost. And a group disability payout is typically in the form of a once-off lump sum.
Discovery Life has explored the insurance gap (the difference between what you need to be covered for and the actual extent of your cover) that millennials face, and in the process has come up with an acronym, Marouns, which stands for “millennials at risk of underinsurance”.
According to Discovery Life’s recently released paper on the topic, a 25-year-old professional earning R20 000 a month has an expected future income totalling R18 million. This takes into account inflation, as well as salary raises and promotions that such a professional would typically experience over a 40-year career.
Not only do Marouns display a “present bias”, giving little thought to the outcomes of their suffering a life-changing event, they also exhibit high levels of risk-taking behaviour, the paper says, coupled with a “naive sense of invincibility and under-appreciation for the probability of suffering a life-changing event”.
Discovery Life’s statistics show that “almost 88% of millennial deaths have been as a result of behavioural, yet largely controllable, causes, such as car accidents”. And the young adult motor vehicle fatality rate is 60% higher than the average of all other age groups.
And while you may, if you have no dependants, be justified in not seeing the need for life cover, be aware that you are more likely to be seriously injured in a motor accident than to die in one.
Discovery Life says it is estimated that of the 145 000 graduates entering the working world at the end of this year, about 3 900 will suffer a life-changing event (disability, serious illness or death) before age 35, 10 000 before 45 and 23 900 before 55.
According to a recent study by a global reinsurer, millennials are more likely to take out travel and mobile phone insurance than life insurance. This “irrational underconsumption of life insurance” is all the more perplexing when you consider what good value it offers for people under the age of 30. Someone in this age group would typically pay R150 a month to insure a smartphone worth R10 000, according to Discovery Life. On a R500 000 car, the millennial would be paying premiums of about R2 200 a month.
However, income protection cover to the value of R18m would typically cost the millennial just R186 a month, Discovery says.
Life and disability cover gets more expensive as you get older, so it’s in your interests to take out such cover earlier rather than later.
DISCOVERY'S SMART LIFE PLAN
Discovery Life recently launched Smart Life Plan, aimed at people under 30, which includes life, disability, severe illness, income protection and a parent funeral cover benefit.
The proportions of these components can be aligned to your specific needs. However, it’s the income protection component that should be of particular interest to single millennials, who are perhaps in their first full-time job after completing their studies.
A typical income protection policy will pay out a certain percentage of your current salary (with annual inflation-linked increases) until retirement. Smart Life Plan has a promotion tracker benefit that takes into account your promotions over the course of your career, resulting in a series of jumps into higher salary brackets. These “jumps” are mimicked in the income protection payments you receive after a claim.
It also includes a travel protector benefit, which allows you to take time off work to travel and retain your income protection benefit (something, according to research, millennials are doing more often than previous generations).
Smart Life Plan forms part of Discovery’s shared-value insurance model, which, through the Vitality platform, rewards members for positive behaviour.
Gareth Friedlander, the head of research and development at Discovery Life, says that through a tailored Vitality programme that focuses on responsible driving and health-boosting activities, policyholders can get up to 100% of their premiums back. He says the programme aims to change “present-bias” behaviour, which is common in millennials, and encourage them to lead healthier, safer lifestyles.
The minimum premium is R100. For 100% income protection cover, this would provide a starting replacement income of R31 000 a month, worth, at current rand values, over R19 million. (This assumes the cover is for a healthy 25-year-old graduate professional, non-smoker, and the disability occurs at age 25.)
Typically, there are limits on the amount of income protection or disability cover you can take out, so that you won’t be better off after claiming than you were before.