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Navigating the maze: EB for a diversified market

01 April 2016 Walter van der Merwe, FedGroup Life

When structuring employee benefits for the small-to-medium enterprise (SME), there are certain principles that should be applied regardless of the size of company or the socioeconomic circumstances of staff members.

Foremost among these is the selection of an employee benefits provider and the cost implications thereof.

Advisers need to understand that, from a risk-rating perspective, group cover will be cheaper than individual policies due to cross subsidisation; males cross subsidise females, and the youth cross subsidise the mortality risk of older individuals.

The cost factor

As such, underwriting is only required above a certain limit for some employees, whereas individual policies require underwriting from the first rand insured.

The cost of these benefits will then come off contributions to an umbrella fund, along with the provider's administration costs. This is priced into the offering and included in the total contribution rate.

Providers that levy additional admin fees against retirement savings erode value and nullify the cost benefits of umbrella funds. Therefore, advisers need to be aware of cost structures before advising their clients on potential offerings.

They should also be wary of providers that undercut the price for group cover initially to secure business only to implement double-digit escalations in subsequent years to cover the shortfall. Always remember, if it sounds too good to be true, it usually is.

Focus on metrics

With these principles in place, the information then needs to be extracted from employees for the insurer to determine adequate cross subsidisation ratios and price the group benefits. These include gender, date of birth, occupation and income of employees.

While occupation determines risk, income ultimately determines employee group benefits as a person's basic financial requirements generally do not vary based on industry verticals.

Take for example a small manufacturing business with 20 employees; most of whom are semi-skilled or unskilled. They work with machinery and income levels are usually low. They generally support an extended family.

In this instance, an adviser should look at the basics, bearing in mind the cost of benefits because the higher the sum insured the more expensive the premium. The cost of the group cover is proportional to salary. The basic requirement would include life cover which should not exceed three times the annual salary for management and no more than once the annual salary for factory workers to remain affordable.

Funeral cover of at least R15 000 should be included as it's a relatively cheap benefit comparatively and meets an important need for these socio-economic groups, because the benefit extends to the entire family. To cover the potential risks of working on the factory floor, capital disability should be included. A lump sum benefit is preferable as it's more cost effective than income protection.

The other side of the coin

Conversely, a small law firm that employs mostly qualified professionals has a vastly different risk profile for work-related injuries. While most staff will earn good salaries, there are also low income earners in this business such as the secretary, office administrator and cleaner. This creates massive income disparity that the adviser should consider to categorise levels of cover between high and low earners.

As a starting point, the higher earners can consider life cover that equates to five times their annual salary to take advantage of the cheaper cover through the group scheme. The lower income earners can consider life cover of three times their annual package to keep it more affordable.

In this instance, income disability cover is more important than capital disability for higher earners to maintain their standard of living. They can also afford the premium. The lower earners should consider lump sum disability of three times their annual salary. Due to the low cost and the minimal impact it has on premiums, funeral cover is worth including for both groups as it pays out within 48 hours.

Additional cover for higher earners should include critical illness and education trust cover, which continues to pay for the education of their children should they pass away as they can afford both benefits.

Encourage following the standard

The industry standard for retirement savings is 10% of pre-tax income. Higher earners could go higher to take advantage of new tax structures. However, it's wise to keep the all-inclusive premium – risk benefits and retirement – to no more than 15% of pre-tax earnings for lower income earners.

Finally, advisers need to understand that they should never negate their requirement for consultation, regardless of the degree of cover offered. While individual consultations may be the norm with high income earners, there is a need to meet with everyone before structuring employee benefits because all employees have a right to consultation regardless of the fees that will be charged. This can of course take the form of a group consultation for lower income earners.

The adviser should also be involved in regular client engagements. This is an opportunity to provide updated info to employees and foster stronger relationships. This could lead to opportunities to up-sell to clients or find other opportunities to sell financial products to make the whole transaction more viable rather than relying solely on once off upfront commissions that do not benefit anyone in the value chain in the long term.

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