South Africans remain massively underinsured against disability, and even if you do have cover, you may be at risk because it may be inappropriate – most of us have ignored temporary disability cover, have too much lump-sum disability cover, and too much of that lump-sum cover is an accelerated or early benefit on life cover.
This is revealed in the latest survey by True South Actuaries, which first reported, in 2007, on how woefully underinsured against death and disability we are.
True South’s 2010 update of its assurance gap study showed that the shortfall between the amount of death and disability cover we should have and what we do have was R18.4 trillion – a shortfall of R7.3 trillion in life cover and one of R11.1 trillion in disability cover.
This week, True South released new research commissioned by FMI, a company in the Lombard Insurance Group specialising in income protection. The research shows that:
* Life cover is sold at double the rate at which disability cover is sold, despite the fact that we should, on average, be buying 43 percent more in disability cover than life cover.
* 50 percent of disability cover is sold as accelerated cover – that is, an early payout of your life cover that diminishes the amount for which your life is insured. However, True South fears that we don’t all understand how accelerated cover works, and should you become disabled and get an accelerated payout, your remaining life cover may be even more inadequate.
* Only 17 percent of permanent disability cover sold is income protection that pays out a monthly income on permanent disability. The remaining 83 percent pays out a lump sum on disability. But True South says the vast majority of cover should be income protection rather than lump-sum cover, because using a lump sum to provide for your future income needs is too risky.
* The shortfall in our temporary disability cover is proportionally much worse than the shortfall in permanent disability cover – we are underinsured by between 75 and 93 percent of what we need in temporary disability cover. And you are more likely to suffer a temporary rather than a permanent disability.
* Some of us may have mistakenly bought critical illness cover, thinking that it will cover all our disability needs.
The survey reveals that 60 percent of assurance South Africans buy is life cover and 30 percent is disability cover.
True South says it should be the other way around, because on average our need for disability assurance is greater than that for life assurance.
In its 2010 study, it calculated that the average earner who buys cover for his or her family should calculate the required level of life cover as that which will replace 68 percent of his or her income.
By contrast, the level of disability cover you need should, on average, be calculated to replace 97 percent of your income. The reason you need more disability cover than life cover is because you will still be part of your household and its expenses after becoming disabled.
Using these numbers, True South says, the average household should have 43 percent more disability cover than life cover.
In the case of earners who are single, the ratio of disability cover to life cover would be even higher if the single person has no family to provide for – even to the extent of a single person not needing life cover at all.
However, True South says, the 2010 study showed a huge gap in the amount of disability cover we have – about R11.1 trillion too little cover, and the cover we have meets only 38 percent of our potential disability needs.
The 2010 study showed the gap in disability cover was greater than that in life cover, and True South says that to correct this imbalance we should be buying more disability cover than life cover at a rate even higher than 43 percent.
New sales of permanent disability cover are heavily skewed in favour of lump-sum benefits rather than income benefits, True South’s report says.
It says many of us are buying cover that pays out a lump sum on permanent disability to use to replace our income if we are disabled.
True South says taking lump-sum cover for your income needs is inherently risky because many of us may not necessarily have the skills or the discipline to manage large amounts of cash.
In addition, when you take a lump sum to cover an income need, you are taking on a number of risks. These include interest rate risk, inflation risk, longevity risk and currency risk.
The report says it is questionable whether consumers have sufficient understanding of the extent to which they are exposing themselves to these risks and whether choosing a lump sum to provide for an income need is appropriate for you.
“A resource-rich insurer would be far better equipped to carry these risks,” it says.
Brad Toerien, chief executive officer of FMI, says while you take the risk with a lump sum, with a monthly income replacement the risk “sits with the industry, which is where it should sit” and you are secure. In addition, premiums for income replacement tend to be cheaper than lump-sum disability cover premiums and are currently tax-deductible, he says.
True South says that if you do opt for lump-sum cover, you need to protect yourself against the risks you face providing an income by buying between 32 percent and 41 percent more than the lump sum amount you calculate you will need to pay an income.
True South and FMI estimate that, without changing the size of the insurance market, the income protection market in South Africa should be nearly 10 times bigger – R524 billion instead of R57 billion.
Accelerated cover is not necessarily a bad thing if it is used correctly, but in many cases it is not, Toerien says.
If, to cover yourself in the event of disability, you have income protection as well as lump-sum cover to pay off your outstanding debts, you can take an accelerated disability benefit on the lump-sum life cover to pay off the debt earlier should you be disabled.
However, if your lump-sum cover is also intended to provide for your family, you need to be sure that the life cover is high enough to provide both the accelerated benefit on disability and for other needs that may arise on your death.
If you have only lump-sum life cover and your disability cover is an accelerated benefit of that cover, you are likely to be underinsured for permanent disability, because you should have more disability cover than life cover.
In its report, True South questions whether we have sufficient understanding of our needs, the life policies available and how to use accelerated cover.
True South says the level of critical illness cover we buy is “surprisingly high”. It says if you assume the life cover we have is intended to replace 68 percent of our income, some people are buying critical illness cover worth 1.7 times their income.
It says this might point to some consumers incorrectly buying critical illness cover as a proxy for disability cover.
It may also be that the level of critical illness cover is correct but the level of life and disability cover is incorrect, True South says.
WHY YOU NEED TEMPORARY DISABILITY COVER
You are 40 times more likely to suffer a temporary disability than a permanent disability, yet South Africans have only between seven and 25 percent of their needs covered for temporary disability, Brad Toerien, chief executive of FMI Income Protection Specialists, says.
Ninety percent of disability claims are for disabilities that last less than 90 days, Toerien says, which makes a strong case for temporary disability cover.
This cover provides you with a monthly income for a temporary disability after a short waiting period, and you can claim multiple times. The benefits are paid until you recover fully or until the end of your benefit period, which can be up to 24 months.
In its latest research, True South Actuaries say temporary disability cover amounted to between 0.3 percent and 0.8 percent of the level of permanent disability cover sold over the five years to the end of 2011.
True South estimates that, to provide adequate benefits, temporary disability cover should, on average, be three percent of the level of permanent disability cover.
The shortfall between the amount of temporary disability cover South Africans need and the amount they have has potentially serious implications, True South says. It says the Momentum/Unisa Household Financial Wellness Index for 2011 shows that the average South African household is drifting into the financially “unwell” category, and credit bureau statistics show that millions of credit-active consumers are already behind on repayments. This means the average household is particularly vulnerable to detrimental changes in financial circumstances, such as a temporary disability during which income is lost.
Toerien says temporary disability cover is the type of assurance that self-employed South Africans need most, because without properly insured income streams, thousands of self-employed individuals and business owners – and their employees and dependants – could find themselves in catastrophic circumstances.
“Temporary disability does not only cover the serious illnesses and accidents; it includes common conditions such as pneumonia, bone fractures, mumps, sprains and strains. So we have established actuarially that life and critical illness is oversold compared to disability cover, and, within disability, temporary cover is largely ignored,” Toerien says.
THE SENSIBLE WAY TO BUY ASSURANCE
If you have more life cover than disability cover, too much lump sum and too little income disability cover, zero or too little temporary cover, or are using an accelerated life benefit to provide for your disability income needs, you may need to review your life assurance portfolio.
A qualified independent financial adviser should be able to assist you to identify your needs and how best to cover them.
The True South report says the well-informed consumer who has no financial constraints would buy the following basket of disability protection:
* Temporary disability cover to provide an income that mimics the income you will lose if you are disabled, from the date of your disability until you recover or become eligible for permanent disability cover benefits – it can take a while for the permanence of your disability to be established to the satisfaction of your life assurer. If you are a salaried employee, your temporary cover should provide cover once any other protection you have, such as sick leave, is exhausted.
* Permanent disability lump-sum cover to provide a lump-sum payment on permanent disability for once-off expenses you may have – for example, to settle your debt or to make lifestyle changes.
* Permanent disability income replacement benefits to provide a monthly income from the time your temporary disability stops paying until your retirement, when you qualify for retirement benefits. The benefit should mimic the income you have lost.
* Critical illness cover. Brad Toerien, chief executive officer of FMI, says your disability assurance covers a range of events that is broader than those covered by a typical critical illness policy. He says your income protection cover should provide for your loss of income either from a critical illness or a permanent disability, and critical illness cover should provide additional funds you may require only in the event of a critical illness – for example, for treatment not covered by your medical scheme or to enable you to reduce your workload after the illness.
He says you should check the purpose of your critical illness cover and ensure that you are not using it, possibly inadequately, in place of disability cover.
Finally, Toerien says you should make sure your cover really is cover. He warns that products that offer a lot of “bells and whistles” and claim to cover everything from life and disability to critical illness needs should be carefully examined.
It is important to put in place the correct combination of temporary and permanent income replacement cover, and then select additional benefits that will supplement this as required, he says.
Paul Zondagh, an executive director at True South, says there is a massive opportunity for life assurance companies to sell more income benefits to consumers.