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 145000 graduates entering the job market at the end of this year, about 3900 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 short-term 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 R100000 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 R100000 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 R100000 of life cover, compared with someone who takes out cover for the first time at 50, who would pay R1320 per R100000 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 R20000 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 one-seventh 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 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.