Your product needs change as you age. For example, life cover is not essential when you’re young and single with no dependants (although ironically this is when it is cheapest). It is absolutely essential if you have a family and are the primary breadwinner. It becomes less essential again later in life when you have built up a decent pot of retirement savings and your children have left home.
While most people grudgingly acknowledge the need for life cover, they tend to underrate disability cover. Some planners argue that it is even more important than life cover, particularly if you are young and have your career ahead of you, and particularly if you are single.
If you were permanently disabled, with serious physical and/or mental impairment that left you unable to perform any job whatsoever and therefore unable to earn an income - you were badly injured in a motor accident, for example - what would you do? You would need to finance your day-to-day living expenses for perhaps 50-odd years, let alone find the money for additional medical expenses.
Disability insurance is complicated. You get lump-sum cover, which typically only pays out for permanent disability. An increasingly popular type of cover, income-protection cover, will provide a monthly income to replace your salary while you are not able to earn, and it may be for temporary or permanent disability. The disability can arise from any of a variety of causes - either disease-related or accident-related. Your occupation matters, because the benefit is dependent on whether or not you can continue doing your job - for example, losing a leg might not hinder your career or earning power if you worked in an office, but it would if you were a professional rugby player.
The Association for Savings and Investment South Africa (Asisa) recently released the results of its latest insurance gap research, undertaken by True South Actuaries and Consultants. The study quantifies the gap between what South African households are bringing in and what they would receive in insurance benefits if the household’s breadwinner lost his or her life or was permanently disabled and unable to work. The study reflects the situation at the end of last year, and follows previous studies for the years 2006, 2009, 2012 and 2015.
The actuaries calculated that, in the event of disability, a household would need 78% of the breadwinner’s earnings to maintain its standard of living, but this did not take into account any extra medical expenses the household may incur. They assumed the benefit would need to last until retirement age and that the policyholder was making separate provision for retirement. They took into account long-term retail cover, group cover (cover provided under your employee benefits) and government grants for disabled people. They excluded short-term accident cover, funeral cover or compensation from the Road Accident Fund or Compensation Fund.
The study reported that there were 15.6 million earners in South Africa (people between 18 and 65 earning a steady income). It expected, for this year, that there would be 51 642 cases a year of permanent disability in this group, or 141 incidents a day.
The average South African earner, according to the report, earns an annual gross (pre-tax) income of R183 649. The poorest 20% earn R14 416 a year, on average, and richest 20% R619 859, on average.
The average earner needs R2.3 million worth of disability cover. However, he or she has cover of only R1.1m, leaving a gap of R1.2m.
In the poorest segment of the population, there is no gap - in fact, this group would receive more than they needed, through the state disability grant.
Among the richest 20%, the disability cover needed for someone earning R619 859 a year is R6.3m. The study found that the average earner in this group had cover to the value of only about R3m, leaving him or her R3.3m underinsured.
The breakdown according to age shows that people under 40 make up almost two-thirds (9 million of 15.6 million) of the working population. This group is the most underinsured for disability: earners under 30 had only 38% of the cover they needed, on average, and those between 30 and 39 only 44%.
While the risk of disease-related disability is higher in the older age groups, according to Liberty’s claim statistics, the risk of accident-related disability is higher in the under-40 group.
The Road Traffic Management Council’s accident report for last year does not give statistics of car accident injuries, but its fatality statistics give a good indication of the risks younger people face: last year 12921 people died on our roads, of which 48% were aged between 25 and 40.
As the Asisa report suggests, you should be looking at replacing 75% to 80% of your gross income. Shop around, comparing benefits and pricing, be sure to read the small print, and fully understand what you are buying.
Income protection for young earners
Life Insurance company FMI, a division of Bidvest Life, is targeting young earners with its income protection product.
FMI chief executive Brad Toerien says: “While the life insurance industry typically focuses on lump-sum benefits, we see income protection as the foundation of all financial planning. We urge all working South Africans to insure their monthly income first, before anything else - and only then, after your income is secured, consider lump-sum benefits to cover additional expenses.”
Toerien gives the example of Patrick, 25, who has just qualified as an electrician, has landed his first job and bought his first set of wheels. What risks does he face?
According to FMI’s risk statistics, a 25-year-old man has a 92% chance of sustaining a temporary injury or illness during his career, a 37% chance of a critical illness, and a 15% chance of permanent disability.
“For early earners, whose entire future earnings lie ahead of them, protecting this earning potential against life’s risks is of paramount importance,” Toerien says.
Insurance gap widens
South Africa’s total life and disability insurance gap widened between the end of 2015 and the end of 2018, from R28.8 trillion to R34.7 trillion. This is according to the 2019 Asisa Life and Disability Insurance Gap Study, undertaken by True South Actuaries and Consultants. The life cover portion of the gap was R15.4 trillion. The disability portion was R19.3 trillion.
Rosemary Lightbody, senior policy adviser at Asisa, said in a media presentation, on the release of the study, that this represents a shortfall of about R1 million in life cover. It is also a shortfall of about R1.2m in disability cover, for the average South African.