Among other things, I am a trustee on the boards of two defined contribution retirement funds. One of the tasks of a retirement fund trustee is to approve distributions to dependants and beneficiaries on the death of a member before retirement.
Recently, I unfortunately had to sign a number of distributions. Of these, the oldest fund member who died was 52 years of age, most of the others were in their forties and at least one was still in his thirties.
The distribution for each deceased member is divided into two parts. The first part is the accumulated savings, which is made up of the contributions of the member and the employer plus investment growth.
The second part is the group life assurance, which, in the case of these funds, is a three-times multiple of current pensionable income (this means basic salary and not allowances such as car allowances).
What worried me about most of the distributions was that the total amount provided to the dependants was often less than R500 000. And this was often the total amount that would be left to an unemployed mother and children on which to live. In other words, the member of the fund had made no other provision, such as taking out life assurance, to ensure that his or her dependants could maintain the lifestyles they had enjoyed before the member's death.
One of the great advantages of a defined benefit scheme is that when a fund member dies, the pension (benefit) received by the dependants is calculated as if the member of the fund had continued to work until retirement age.
With a defined contribution fund, the dependants only receive a pension benefit to the extent of the money accumulated in the fund up to the time of the member's death plus any group life assurance.
So, for example, let's say we have two fund members of a defined contribution fund who died recently:
- Jack A (aged 28) was a member of five years' standing, married with two children aged two and six; he earned a pensionable salary of R15 000 a month (R180 000 a year); had accumulated retirement savings of R140 000; and his dependants were entitled to a group life benefit of three times annual salary. The result is that Jack A's dependants would receive R140 000 plus R540 000, totalling R680 000.
Let's assume a return on the amount of a generous 10 percent a year. That is R68 000 a year, or R5 666 a month. So Jack A's family now has to take a cut in income of almost 60 percent.
It was absolutely imperative that Jack A make up the shortfall with life assurance cover against death as well as disability.
- Jill B (aged 47) was a member of 25 years' standing, married with two children aged 16 and 18; she was earning a pensionable salary of R30 000 month (R360 000 a year); she had accumulated retirement savings of R1.2 million; and her dependants were entitled to a group life benefit of three times annual salary.
The result is that Jill B's dependants will receive R1.2 million, plus R1 080 000, totalling R2 280 000.
Let's again assume a return on the amount of a generous 10 percent a year. That is R228 000 a year, or R19 000 a month. So, Jill B's family now has to take a cut in income of almost 40 percent.
So, although Jill B's dependants are far better off than Jack B's, it was still absolutely imperative that Jill B had made up the shortfall with life assurance cover against death as well as disability.
I have simplified these calculations by ignoring any tax consequences and the debilitating effect of inflation. It is essential that all members of defined contribution funds should do these simple calculations for themselves.
Even defined benefit members will probably also find a shortfall.
If you find a shortfall (as you surely will), I would suggest you immediately get hold of a financial intermediary to do a financial needs analysis to establish exactly how much life assurance against death and disability you require to ensure your family will be financially secure in the event of the unexpected happening to you.
You should not delay. That proverbial bus could be just around the corner.
Even if you already have risk life assurance against death and disability, you should check regularly whether it is sufficient.
Gerhard Joubert, the chief executive of the Life Offices' Association, tells me that the LOA has no actual figures on what percentage of the population has life assurance, but there is sufficient data for the industry to know that there are too many people without risk assurance and even when people do have risk assurance, they have too little or no disability assurance.
He says while many people take out life assurance against dying, they avoid taking out equally important disability assurance against being sick and/or injured and unable to earn a living.
Joubert points out that many funds and employers are reducing the amount of group life assurance because the Aids pandemic is pushing up the costs of premiums. So, rather than pay less to retirement savings, group risk assurance benefits are being reduced.
It is in the area of risk provision that life assurance companies come into their own.
They may not provide the best investment products, but every one of us, except the very wealthy, needs life assurance to ensure the future welfare of our dependants.