Most income earners are massively underinsured for death and disability, which will have dire financial consequences for their dependants.
Most income earners are massively underinsured for death and disability, which will have dire financial consequences for their dependants.

Risk cover gap exposes families to ruin

By Bruce Cameron Time of article published Nov 17, 2013

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The vast majority of 13 million employed South Africans are ignoring the fact that, if they die prematurely or are permanently disabled, their families will not be able to maintain their standard of living – in fact, most will be left destitute.

On average, most working South Africans between the ages of 18 and 65 are under-assured by 62 percent for death and by 60 percent for disability. For the average income earner, this translates into a shortfall in life cover of R700 000 and a shortfall in disability cover of R1.1 million.

As a result of under-assurance, most of the 173 000 households that lost an income earner this year because of death or disability are likely to be suffering severe financial hardship.

The shortfall in risk life assurance is revealed in research commissioned by the Association for Savings & Investment SA (Asisa). The study, which is conducted every three years, was undertaken by True South Actuaries and Consultants in partnership with the Bureau of Market Research at the University of South Africa.

Peter Dempsey, deputy chief executive of Asisa, says the position has become worse since the first study was completed in 2007.

“The sad reality is that South Africans are critically under-insured for death and disability.”

In 2007, the gap in death and disability assurance was estimated to be R10 trillion; in 2010, it was about R18.4 trillion. It is now R24 trillion.

So, if you are Mr or Ms Average and the main breadwinner in your family dies or is disabled today, you will either have to slash your living expenses by between 30 and 34 percent, on average, or earn more – an extra R3 177 a month if the breadwinner dies or an extra R4 696 a month if the breadwinner is disabled and unable to work.

Closing the assurance gap will require income earners to spend, on average, an additional 2.9 percent of their income a year on life cover (a total of R45 billion a year) and an additional 1.8 percent a year on disability cover (R28 billion a year).

True South says that, because earnings (which drive the need for risk life assurance) and cover have increased at similar rates over the past three years, the assurance gap as a percentage of the assurance need remained largely unchanged, at about 60 percent.

It is not low-income earners who are most at risk to a shortfall in assurance, but people who earn more than R150 000 a year.

The average assurance shortfall for this group means that households would need to find an additional R10 000 a month should an earner die or R20 000 a month should an earner become disabled. The alternative would be to cut household expenditure by 36 percent in the event of a breadwinner’s death or by 46 percent should the breadwinner become disabled.

The study shows that, although people in the lowest income bracket are likely to have a shortfall in life cover of R100 000, the reverse is true for disability assurance. This is because the state’s disability grant is very effective at replacing lost income in the lower-income brackets. Most South Africans who earn less than R1 500 a month do not need disability assurance.

Dempsey says that, according to the study, high-income earners older than 55 are the only group of people likely to have sufficient life and disability cover. This is because they benefit from group life and disability cover as a result of belonging, for many years, to an employer-sponsored retirement fund.

Single people are most likely to be over-assured, and top earners and breadwinners with a tertiary education are more likely to have enough life assurance.

The people who are most exposed to potential financial disaster, particularly if they were to become disabled, are those under the age of 30.

THE EARLIER YOU BUY, THE LESS YOU ARE LIKELY TO PAY

The younger and healthier you are when you buy risk life assurance, the more likely it is that you will pay a lower premium.

But if you leave it until you are middle-aged or older, you may not be able to buy assurance, or the cover may be limited and expensive.

Peter Dempsey, deputy chief executive of the Association for Savings & Investment SA, says if you develop a serious medical problem later in life, or engage in dangerous activities, you may find it difficult to find a life assurer that is willing to insure you. And if you do, expect to pay hefty premiums – the higher the risk you pose to the life company, the more your life cover will cost.

Life cover is important, but disability cover is essential, Dempsey says. “Even if you do not have any dependants, you need disability cover to provide for your own needs in case you lose the ability to earn a living.”

The younger you are when you become disabled, the higher the lump sum benefit you will require to survive financially, he says.

“The older you are, the greater the likelihood that you will have made provision for retirement. 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.”

Dempsey says it is important that you obtain advice from a qualified financial adviser when deciding how much cover you need. Your decision will be influenced by how much you can afford to pay in premiums, your number of dependants, your lifestyle, your debts, and existing death and disability cover.

“Your adviser should also help you to review your life and disability cover regularly or when your circumstances change, to make sure that you are not suddenly underinsured,” he says.

CONSEQUENCES CAN BE SEVERE

The consequences of not having sufficient life assurance can be disastrous, Peter Dempsey, deputy chief executive of the Association for Savings & Investment SA, says.

For households, insufficient assurance may mean having to sell the family home or a car, or a drastic reduction in their living expenses. If these measures do not make up for the lost income, the surviving adult will have to find ways of earning an extra income.

Dempsey says it is not easy to quantify the effect of insufficient life assurance on the economy. However, the loss of every income earner has the potential to reduce the financial well-being of a wider group of people and, ultimately, this affects the country as a whole.

SHORTFALL RUNS INTO TRILLIONS

The 60-percent shortfall in risk life assurance translates into R9.3 trillion in the event of death before retirement and R14.7 trillion in the event of permanent disability before retirement.

The actual amount of death cover required for all employed South Africans is R15.1 trillion, while the amount for disability cover is R24.4 trillion. To put these amounts into perspective, government’s budget to run South Africa this year is R1.14 trillion.

A trillion is R1 million million, or R1 000 billion. If you earn R10 000 a month, you would have to work for more than eight million years to earn R1 trillion.

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