1. Risk products: navigating the complexities
Francois Tranter October 2010

2. Agenda
• Mapping product and need
• Risk products and retirement planning
• Level or compulsory premium pattern?
• How much critical illness cover?
• Stand-alone or ancillary critical illness?
• Income disability or lump sum disability?
• Opportunities

3. Mapping product and need
Lump sum
disability benefit
Temporary
Income Protector
Income Protector
Permanent disability
/ impairment
Death
Lifestyle
protection
Death Benefit
Temporary disability
/ critical illness
Critical illness benefit
Death Benefit
Death Benefit
Asset
protection
(settling debt)
Functional
impairment benefit
Income
protection

4. Agenda
• Mapping product and need
• Risk products and retirement planning
• Level or compulsory premium pattern?
• How much critical illness cover?
• Stand-alone or ancillary critical illness?
• Income disability or lump sum disability?
• Opportunities

5. Impact of longevity on required savings
• Retire at 75% of income at age 65
• Impact if you live past age 80
Starting age Required savings as % of income
Until 80 Until 85 Until 90
25 12.5% 15% 20%
35 20% 25% 30%
45 35% 45% 50%
Further assumptions
 Inflation 5%
 Net investment return 8%
 Salary and RA contribution increases 5%

6. Impact if you retire later
• Retire at 75% of income
• Live until age 85
Starting age Required savings as % of income
Retire age 65 Retire age 70
25 15% 7%
35 25% 15%
45 45% 25%
Further assumptions
 Inflation 5%
 Net investment return 8%
 Salary and RA contribution increases 5%

7. Case study
• Assumptions
– Current age 30
– Retirement age 65
– Inflation: 5%
– Net return: 8%
– Salary R30 000 pm
– Salary and contribution increases in line with inflation
– Retire at 75% of income

8. Shortfall if you live past 80
65 80 85 90
30
R18m
R22m
R26m
Required capital
Savings shortfall
Capital shortfall
R4m
R8m
Saving as per FNA: R4 600 pm
R1 150 pm
R2 150 pm

9. Impact if you work longer
70 80 85 90
30
Capital built up: R28m
Capital surplus
Savings of R4 600 pm continues
until age 70
R5.5m
R12m
65

10. Implications from a risk product perspective
• Income protection needs to be extended

11. Impact of impairment on retirement capital
• Case study
– Male age 30, best rates, level premium
– Retire at age 65, die at age 85
– Impaired 5 years prior to death
– Cost of frail care: R10 000 pm
– Total cost: R550 000

12. Impairment provision alternatives
• Insurance solution at 1/10th of the cost
Cost of saving for impairment Cost of insuring impairment
R500 pm R50 pm* – R150 pm**
*Based on impairment benefit paying R10 000 pm for whole of life
**Premium of a comprehensive critical illness benefit of R550 000

13. Implications from a risk product perspective
• Income protection needs to be extended
• Retirement capital needs to be protected
• Premium needs to be sustainable

14. Agenda
• Mapping product and need
• Risk products and retirement planning
• Level or compulsory premium pattern?
• How much critical illness cover?
• Stand-alone or ancillary critical illness?
• Income disability or lump sum disability?
• Opportunities

15. Level or compulsory premium?
0
50
100
150
200
250
300
1 2 3 4 5 6 7 8 9 10 11 12 13 14
Level 5% Compulsory 10% Compulsory Risk curve
 Premium for a 10% compulsory 50% is lower than level premium for a 40
year old

16. Level or compulsory premium?
Initial affordability Long term sustainability
Expected duration of benefit
10% compulsory Level premium pattern

17. Initial affordability versus
long term sustainability
Year Income Level 10% compulsory
1 R20,000 R1,166 R600
2 R21,000 R1,233 R728
3 R22,050 R1,309 R884
14 - 17
18 R45,840 R4,838 R14,483
19 R48,132 R5,365 R17,357
20 R50,539 R5,956 R20,796
 In year 20, level premium makes out 12% of client’s income, vs 41% with
10% compulsory
5% increase in income and risk benefits

18. Cost over the duration of cover
Level 10% compulsory
Initial premium R1,166 R600
Cost* over 10 years R94,116 R72,162
Cost* over 20 years R133,871 R151,225
Cost* over 30 years R150,664 R237,848
Cost* over 40 years R157,758 R332,754
 Compulsory premium pattern more cost-effective than level over the short
term and vice versa
*Present value of premiums at 9% discount rate; 0% benefit increase
How much money must I put into my bank account today
to fund my future premiums?

19. Benefit-level funding: an example
Lump sum disability
10% compulsory
Temporary
Income Protector
5% compulsory Income Protector
5% compulsory
Death Benefit
5% compulsory
Critical illness benefit
Level
Death Benefit
10% compulsory
Death Benefit
Level
Functional impairment
Level
Lifestyle
protection
Asset
protection
(settling debt)
Income
protection
Permanent disability
/ impairment
Death
Temporary disability
/ critical illness

20. Agenda
• Mapping product and need
• Risk products and retirement planning
• Level or compulsory premium pattern?
• How much critical illness cover?
• Stand-alone or ancillary critical illness?
• Income disability or lump sum disability?
• Opportunities

21. How much critical illness cover?
• No scientific way to determine amount
• Guidelines
– Expenses not covered by medical aid
– Moving to a more expensive medical aid
– Access to latest medical technology
– Provision for child care, the services of a driver or domestic
– Spouse going on unpaid leave
– Working fewer hours after an event

22. Agenda
• Mapping product and need
• Risk products and retirement planning
• Level or compulsory premium pattern?
• How much critical illness cover?
• Stand-alone or ancillary critical illness?
• Income disability or lump sum disability?
• Opportunities

23. Stand-alone or ancillary critical illness?
Role of critical illness benefit
Medical aid shortfall
Working fewer hours
Stand-alone or ancillary?
Stand-alone
Ancillary*
*Provided that debt is settled with proceeds

24. Impact of ancillary critical illness
claim
Liability
R1m
Death
R1m
Disability
R1m
Critical illness
R500 000
Lifestyle
adjustment
R?
Need Stand-alone Ancillary Ancillary
Benefits before claim
=
=

25. Impact of ancillary critical illness
claim
Liability
R1m
Death
R500 000
Disability
R500 000
Critical illness
R0
Lifestyle
adjustment
R?
Need Stand-alone Ancillary Ancillary
Benefits after 100% claim
>
>
Shortfall Shortfall

26. Agenda
• Mapping product and need
• Risk products and retirement planning
• Level or compulsory premium pattern?
• How much critical illness cover?
• Stand-alone or ancillary critical illness?
• Income disability or lump sum disability?
• Opportunities

27. Income disability benefits vs lump sum
disability benefits
• Advantages of lump sum disability benefits
– Capital balance for dependents on death
– Most cost-effective way to settle debt on permanent disability
– Manage investment and income withdrawals

28. Income disability benefits vs lump sum
disability benefits
• Advantages of income disability benefits
– Income not dependent on investment returns
– Covers temporary disability
– Covers total and partial disability
– Premiums are tax-deductible
– Most cost-effective way to protect income on permanent disability

29. Income disability benefits vs lump sum
disability benefits
Equivalent lump sum disability benefit to match a
monthly income disability benefit of R10 000
Term to income disability benefit
expiry
Equivalent lump sum disability
benefit
35 years R2.6m
30 years R2.4m
25 years R2.1m
20 years R1.8m
15 years R1.4m
10 years R1.0m
Assumptions
• Disability income benefit payment increases with CPI.
• Lump sum disability benefit invested for an income that increases with CPI.
• CPI 5%; Interest 8%.
• Tax has not been taken into account. The interest portion of income generated by lump sum benefits is taxable, while
capital repayments are tax free. The proceeds of disability income benefits are taxable. Premiums are tax-deductible in
terms of income disability benefits, but not in terms of lump sum benefits.

30. Income disability benefits vs lump sum
disability benefits
Option 1 (conventional solution)
Benefit Premium
Death benefit : R4.8m R814
Lump sum disability (ancillary): R4.8m R538
Total premium R1 352
Option 2
Benefit Premium
Premium
after tax
Death benefit : R4.8m R814 R814
Lump sum disability (ancillary): R800 000 R90 R90
TIP¹ (1m waiting period; 6m term): R30 000 pm R103 R72
IP² (6m waiting period): R22 500 pm R341 R239
Total premium R1 348 R1 215
1 Temporary Income Protector
2 Income Protector
Case study: Male age 40, home loan: R800 000
Notes and assumptions on disability payment:
• R4.8 million will settle home loan and generate an income of R19 250 per month - enough to cover household’s remaining expenses, including
income tax, for 25 years. Income increases by CPI
• Net return: 8%
• CPI: 5%
• Income disability benefits increase at 5% per year during claim, up to expiry age 65 years
• Income disability benefit fully taxable. Only interest component of income generated by the lump sum benefit (Option 1) is taxable.
• To compensate for this, Income Protector is higher than the income that can be generated by the lump sum benefit.

31. Building blocks
Lump sum
disability benefit
Temporary
Income Protector
Income Protector
Permanent disability
/ impairment
Death
Lifestyle
protection
Death Benefit
Temporary disability
/ critical illness
Critical illness benefit
Death Benefit
Death Benefit
Asset
protection
(settling debt)
Functional
impairment benefit
Income
protection

32. Opportunities
• Think long term
• FNA review
– Extend disability cover
– Add impairment protection
– Add / restructure critical illness benefits
– Restructure to benefit-level funding

33. Contact details
francois.tranter@gmail.com