Covid-19 exposes where we are underinsured
Underinsurance was one of the primary causes of claim-settlement disputes, according to the latest annual report of the Ombudsman for Short-term Insurance. And only about 25% of all motor, home and household insurance disputes ultimately went the way of the consumer.
In the area of long-term insurance – insurance against death, disability and loss of income – the impact of being underinsured can be more dramatic than not being able to replace your household contents. Life insurance payouts are significantly higher – and more life-altering for beneficiaries.
In South Africa, there is a combined life and disability cover shortfall gap of at least R34.7 trillion – excluding medical scheme cover – and that gap is growing, warns Moray Norton, a financial adviser at Investec Life.
He says there is a widening divide between the risk cover that clients take out and the needs of their dependants, which often includes extended family when they become ill, disabled or die.
“Our research shows South Africans consistently underestimate the costs of a severe illness beyond what their medical scheme covers,” Norton says. “This is often most visible in the affluent sector, where insufficient cover can mean significantly downgrading one’s lifestyle, getting into debt, or even heavily compromising one’s retirement savings.”
Moray says significant job losses due to the pandemic are of great concern because those who are not insured or under-insured for income protection are more likely to tap into their retirement savings, at massive cost to their future.
“A person who saves R200 a month from age 20 to age 30, and then lets the money grow, will have more at the age of 65 than a person who saves R200 a month from the age of 30 to 65. That’s the power of compounding and the reason you should never touch your pension. If you lose that, you will never get it back,” Norton says.
The recent Stanlib Savings Report 2020 flagged Covid-19 as highlighting how unprepared South Africans are for unforeseen financial shocks, leaving many without a steady income and forcing them to dip into savings.
Part of the problem is that South Africans underestimate their ability to earn an income, says Marius Botha, managing director of life insurer Stangen, and they insure the wrong risk.
“Ask people what their most valuable asset is, and they’re likely to say their house, or their car. They’re wrong: their most important asset is their ability to earn an income – but few consumers actually protect this asset,” he says.
Statistically, your biggest risk is not dying during the pandemic; it is losing your ability to earn an income. “If illness or injury stopped you from working for an extended period, would you be able to survive on savings or sick leave alone?” asks Botha. “Without your income, would you be able to pay everyday expenses like your bond, rent, groceries or school fees, and take care of your family and financial commitments? If the answer is ‘no’, you might want to consider income protection.”
Covid-19 has highlighted not only social disparities, but also human adaptive traits. Spending habits have changed and people have become more savings-conscious.
Moray says job security has been rattled and South Africans have become more conservative spenders. “You may find some will retire better off, because they will now save with more discipline. Those who tapped into their retirement savings will have a much harder road to walk, though.”
He agrees that income protection and severe illness cover are essential: “You don’t see yourself as being disabled – it always happens to someone else. But people underestimate their value and the value created over their working career. How much wealth am I able to create or lose if something happens? You’re protecting your future wealth and well-being.”
With more awareness around underinsurance, the pandemic has underscored our vulnerability.
Underinsurance is in part cultural, because many rely on extended family to step in where there’s a gap in benefits. “Our research shows financial provision flows in multiple directions within the family structure,” Moray says. “If one person is under-insured, it becomes another’s responsibility to pick up the slack. This burden often sits within the professional or affluent segment, where success comes with increased responsibility – you earn more, therefore you contribute more.”
For many, provision is a privilege, not a burden, and relationships extend beyond the nuclear family. This places more responsibility on policyholders to select appropriate cover to meet their dependants’ needs.