Buying insurance to cover life-changing events such as death and disability may be the last thing on your mind when you are in your twenties, but later in life you will realise that your twenties were the best time to buy risk cover. This is according to Peter Dempsey, the deputy chief executive officer of the Association for Savings and Investment South Africa (Asisa).
Dempsey says 20-somethings should consider the opportunity their age represents for obtaining financial protection, and adds that risk life assurance will always form the cornerstone of their future financial planning.
Your unique personal circumstances should determine the risk cover that you buy, he says, and it is therefore important that you consult a qualified financial adviser before signing up for a product that may not meet your long-term needs.
Dempsey says the main reasons you should buy life and disability cover in your twenties are:
1. You’re most at risk. In your twenties, you are statistically more at risk of being involved in an accident that may result in death or disability, Dempsey says.
Research conducted by Statistics South Africa in 2013 into causes of death found that death rates reach a peak between 20 and 34 years of age. Just over 42 percent of all deaths in the 15-to-29 age group were from non-natural causes, including accidents and car crashes.
Dempsey says that, in most of the accidents that resulted in death, many more people would have been injured and possibly even left disabled. “Therefore, the first risk cover you should buy in your twenties is disability cover, because not only are you at the highest risk of becoming disabled, but you also have the most to lose in terms of earnings,” he says.
The younger you are when you become disabled, the higher the lump-sum benefit you require to survive financially, he says.
“The older you are, the greater the likelihood that you have made provision for retirement. On the other hand, a young person who becomes disabled and can no longer earn an income would have to rely on one lump-sum disability benefit payment for a lifelong income.” For this reason, Dempsey says, a financial adviser could also recommend a disability benefit that pays a monthly income instead of a lump sum.
2. Premiums are cheaper when you’re healthy. People in their twenties are far less likely to have developed illnesses and conditions that may drive up premiums or result in exclusions on their cover, Dempsey says.
Premiums are priced according to the amount of cover required and are also influenced by factors such as age, gender, occupation and health. Women generally pay lower premiums than men, and non-smokers pay lower premiums than smokers.
Dempsey says that premiums are very affordable when you are young and healthy. You are also able to add extra benefits to your policy, such as guaranteed insurability later in life when you may want to increase your cover, as well as premium waiver cover, whereby the assurer will pay your premiums if you are no longer able to earn an income because of disability, dread disease or retrenchment.
Take the example of a 25-year-old man with a degree and an office job who earns a monthly income of R15 000. He takes out life and disability cover for R1 million. Provided that he is healthy and does not smoke or engage in dangerous activities, he could qualify for premiums as low as R146 a month for life cover and R105 a month for disability cover.
The same man 10 years older at the age of 35 would pay premiums of R192 a month for life cover and R160 a month for disability cover, provided he has not developed a serious illness (see the table, link below).
Although the man would have saved money by not paying premiums over the past decade, if he has developed a serious illness, he would have to pay substantially higher premiums with limitations on his cover in future – if he qualifies for cover at all.
3. You are likely to have debts. South Africans are some of the most credit-active consumers in the world, with a household debt-to-disposable income ratio of 78.4 percent. And debt has become more expensive since the prime lending rate rose by 0.25 percentage points in July, to 9.5 percent.
Dempsey says that, because in your twenties you are starting out in life, you are unlikely to have enough savings to cover debts if you die or become disabled.
“If you pass away, the weight of these debts could fall on your loved ones. If you’re left disabled, you’ll have the added burden of medical expenses and loss of income, while still needing to cover these debts.”
4. You may be starting a family. Life and disability cover become really important when you start a family, because it will provide financial support for your partner and your children if something happens to you, Asisa says.
Disability places an even bigger financial burden on a family than death, Dempsey says, because not only does your income fall away, but living with a disability is also expensive.
In the year to June, life assurers paid R366.8 billion to consumers, providing thousands of South Africans with vital benefits following events such as death or disability. This money would have helped families to pay off debts, cover their day-to-day living expenses, fund children’s education and pay for medical care.
According to the Asisa 2013 Life and Disability Insurance Gap Study, which measures the difference between existing life and disability cover and the cover that income-earners actually need, individuals were underinsured by R9.3 trillion for life cover and R14.7 trillion for disability.