I saw this Facebook post the other day and I felt it is one of the most common misconception about insurance. The Eldershield is meant for old age but the pool is young and so the claims are low. However, an insurance product should not be judge based on cash flows but based on its liability.
For instance, you are 40 years old and if the claim is expected to occur at 70 and ends at 80 and assuming a $7,200 a year of payout, the liability to the insurer is given by the formula assuming a discount rate of 3% =
which is $28,269.
If the assets held by the insurer is more than this liability, it is called overfunded status. Otherwise it is called underfunded. An insurance that is underfunded is considered insolvent and hence the scheme will not be sustainable on the long run.
The asset/liability approach can be applied to retirement planning. As a simple example, you are 40 years old and will incur $100,000 a year of expense at age 60 to 90, the retirement liability is =
which is $1.14 million.
In practice, the liability is higher due to inflation. If your assets (excluding residential property) is below this retirement liability, you are technically ‘insolvent’. Under such situation, you can either decrease your liability by delaying retirement or increase your assets through prudent financial planning. The latter is always more desirable but this has to be done early and not just prior to retirement. The official retirement age has been increasing over the years. Thus, delaying the retirement age is a popular method of decreasing the retirement liability - not because it is the best way but because most people do not plan ahead.
Unfortunately, empirical evidence has shown that employability decreases as one age. Sometime, delaying the retirement age is not even an option.
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