South Africans have, on average, between four and 47 percent of the life cover they need and between 30 and 45 percent of the disability cover they need, the latest life assurance gap study released by the Association for Savings & Investment South Africa (Asisa) shows.

This means that, unless you are one of the exceptions who has sufficient cover, you and/or your family will suffer financially if you die or are disabled before you retire. The families of middle- and high-income earners may never fully recover from this financial setback, while low-income earners are often plunged into a debt spiral, Peter Dempsey, the deputy chief executive of Asisa, says.

The life assurance gap study, carried out for Asisa by True South Actuaries and Consultants, shows that income-earning South Africans and their families are under-insured by a staggering R28.8 trillion. A trillion has 12 zeros, and R1 trillion is a stack of R100 notes from Cape Town to Bloemfontein, True South says.

And, because there are 14 million income-earners in South Africa, the total shortfall of R28.8 trillion equates to an average shortfall of R2.1 million per breadwinner. Just less than half this average shortfall is for life cover and just over half is for disability assurance.

The results of the study are based on the assumption that families would maintain their existing standard of living after the breadwinner dies or is disabled. The calculation of the gap assumes that families would have to replace the breadwinner’s income until he or she would have reached retirement, and that contributions to the breadwinner’s retirement fund would continue until retirement age.

It does not take into account any short-term expenses related to death or disability before retirement, such as funeral costs, medical costs and modifications to homes and cars.

It also excludes cover – known as temporary disability cover – for a disability that results in your being incapable of working for a short period. The calculations are for permanent disability only.

The broad range of incomes in South Africa makes the average figures less meaningful than the averages for each income group (refer to these tables).

Francois Hugo, a founding partner at True South, studied the average death and disability cover in five different income bands and found that the poorest 20 percent of South Africans have, on average, no gap in their disability cover, because they are likely to qualify for the state disability grant of R1 510 a month.

The 2.8 million lowest earners earn up to R26 310 a year, and on average R10 400 a year.

The lowest earners have the lowest need in rands for additional life cover, but their existing cover is only four percent of what they require. On average, these breadwinners have a shortfall of R200 000 in their life cover.

The 2.8 million richest South Africans, who earn more than R214 245 a year and on average close to R500 000 a year, have only 47 percent of the disability cover they need and only 45 percent of the death cover they need. They need, on average, life cover of almost R4.5 million, but they have on average almost R2.4 million too little.

People in this group, on average, require disability cover of R6 million, but, on average, have R3.3 million too little in disability cover. As a result, to maintain their standard of living, households supported by those who fall into the top 20 percent of the country’s income-earners would have to find additional income of almost R13 000 a month if a breadwinner died and more than R17 000 a month if a breadwinner became disabled.

Alternatively, they would have to cut their household expenditure by 36 percent if the breadwinner died, or by 32 percent if he or she became disabled.

People in the middle-income group – the 2.8 million South Africans who earn between R54 000 and R100 000 a year – have, on average, only 16 percent of the disability cover they need and 37 percent of the life cover they need. The average earnings of this group are almost R65 000 a year. For them, the average shortfall in disability cover is R700 000, while the life cover shortfall is R800 000.

The study found that older South Africans have more life and disability cover than younger South Africans.

The most likely reason is that full-time permanent employees usually have group life and disability cover, in many cases through their retirement fund.

Hugo says the gap in life cover has increased relative to the gap in disability cover, probably because of the change in the taxation of income protection benefits. Until March 1 last year, the premiums for income protection policies were tax-deductible, but the benefits paid out were taxed. Since then, the premiums have not been tax-deductible, but the benefits are tax-free.

If you have not adjusted your premiums, your benefit will have increased by the amount of tax you would previously have had to pay.

 

HOW MUCH IS ENOUGH?

South African families are under-insured against the death or disability of their breadwinners by nearly 60 percent. As a result, they will have to cut their living expenses by 30 percent or more if the breadwinner dies or becomes disabled.

On average, it costs 4.2 percent of after-tax income to buy adequate life cover, while it costs 2.4 percent of net income to take out sufficient disability cover. The lowest 20 percent of income-earners need, on average, to set aside an additional 4.1 percent of their income to buy enough life cover; middle-income earners need to spend close to seven percent; and the top earners need to spend, on average, another 3.3 percent of their income.

High-income earners could remove the shortfall in their disability cover by spending two percent of their net income, while middle-income earners need to spend as much as 3.6 percent.

Peter Dempsey, the deputy chief executive of the Association for Savings & Investment South Africa (Asisa), says many consumers do not invest in adequate financial protection, because they believe life assurers do not pay claims. But Asisa’s statistics show that assurers honour the overwhelming majority of claims on underwritten policies (where you have to answer questions about your health or undergo medical tests).

Last year, life assurers paid out R45.5 billion in life and disability claims, a claims ratio of 99 percent.

Dempsey says that, where claims were not paid, it was mostly because policyholders had not been honest when disclosing details about their health or lifestyles.

The claims statistics for non-underwritten policies are not known.