The gap between the life and disability cover that South Africans need and the cover they actually have is a telephone-book number: R28.8 trillion – that’s 28 with 12 zeros.
If you are one of the millions of people who is contributing to the life assurance gap, you are placing your own and your family’s financial security at risk.
The research by True South Actuaries and Consultants into the gap in life assurance cover shows that more than 140 000 income-earning South Africans below the age of 65 are expected to die this year, and more than 46 000 will be permanently disabled. Although this is only 1.3 percent of all of those who work in the formal and informal sectors, there is no guarantee that death or disability won’t affect you or your family.
To check whether you have adequate cover, you need to establish how much money you and/or your family will need in the event of death or disability before retirement. The analysis should take account of your household’s debt, savings and assets.
But if you are looking for a ballpark figure to check whether you should do something about your cover, here are some tips from the calculation used in the study.
Francois Hugo, a founding partner of True South, used the following method to calculate the gap in cover. In this example, he used the richest 2.8 million people who, on average, earn R500 000 a year.
First, he calculated the number of years until retirement, using average retirement ages of between 62 and 65.
He ignored any future job promotions, which would raise your standard of living and require you to increase the amount of cover. Hugo also ignored the tax you pay on your earnings, because you do not pay tax on the benefits paid out from a life or disability policy.
If you receive a lump sum and invest it in interest-earning or dividend-paying investments, there will be tax implications, but if you buy a monthly pension with the money (a voluntary annuity), there will not be any tax implications.
In the case of life cover, Hugo adjusted the income your family will require to account for the expenses they will not have to meet after your death. For example, your family’s accommodation-related expenses are likely to remain the same if they don’t move to a smaller home, but their travel expenses would probably decrease.
Hugo came to the conclusion that, on average, breadwinners who earn more than R214 245 a year need to provide for 64 percent of their income to meet their families’ needs if they die before retirement. This means that if you earn the average of R500 000 a year, you will need R320 000 a year (64 percent of R500 000).
If you are permanently disabled, your income requirement will be higher than R320 000 a year, because your budget will have to continue to provide for your own expenses, such as food, clothing and housing, as well as your family’s.
Hugo calculated a figure of 78 percent of your income to determine your annual income needs in the event of disability.
Then he projected the amount you would have earned until retirement, taking into account an inflation-related increase each year.
Most South Africans have cover for death and disability that pays a lump-sum benefit in the event of death or disability.
If you receive a lump sum and invest it, you will earn returns. As a result, the lump sum you require will be lower than the amount you need per year multiplied by the number of years until retirement.
Hugo assumed that the lump sum could yield a return of 1.5 percentage points above the inflation rate.
If you are single, you don’t need life cover, unless you are contributing towards another household – for example, if you are supporting a parent or sibling, Hugo says.
Hugo did not make any deductions for retirement savings, because you should assume that you will contribute to a fund until you reach retirement age, and that, after retirement, your pension will contribute towards your family’s financial needs.
To calculate the amount of life and disability cover that people actually have, Hugo asked life assurance companies what they would have to pay out if all their policyholders died or were disabled today.
He took into account the life and disability policies you buy in your own name, the group life cover you may have as an employee or retirement fund member, the government grants for which low-income earners may qualify and self-insurance schemes.
You need to ask your financial adviser or broker to advise you on what your benefits would be if you died or were disabled today.
If you want to calculate your life cover needs, life assurers such as Old Mutual and Liberty have calculators on their websites.