THE foremost question in any breadwinner’s mind should be whether his or her dependants will be able to maintain their standard of living if he or she were to become disabled or die before retirement. For many South Africans, the answer to this question is less than encouraging.
According to the latest statistics from the Association for Savings & Investment South Africa (Asisa), South Africans have a total assurance shortfall of R28.8 trillion. This shortfall is the difference between the protection we should have and the protection we do, in fact, have. Even more alarmingly, this “protection gap” has increased by R4.8tn since 2012.
Other salient numbers from the Asisa report are:
• Death cover: all income earners should have assurance of R20.2tn, and the shortfall is R12.9tn; and
• Disability cover: the assurance need for all earners is R28.9tn, while the shortfall is R16tn.
Johan Minnie, the group executive of sales, distribution and bancassurance at Liberty, says: “Many people believe that misfortunes won’t happen to them, but these statistics highlight the importance of life assurance. A shocking event, such as the death of a breadwinner, can see a family’s entire asset base decimated.”
Liberty’s claim statistics for 2016 show that it paid out R4.3 billion in valid claims, 13% more than 2015. This amounts to a claim being paid every eight minutes, or R17 million paid out every working day.
The Asisa report also shed light on how different age groups make assurance decisions, with the younger generation being the ones at most risk of being under-assured. The reports found that:
• Earners aged between 30 and 39 typically need life cover of R1.8m to ensure that their household will be able to maintain its standard of living after the earner’s death. But these earners typically have life cover of less than R500 000, leaving an average assurance gap of more than R1.3m.
• There is no assurance gap for earners of 55 or older, which means that earners in this age group are more likely to be over-assured than under-assured.
• Low-income earners are less likely to need disability assurance, because the state’s disability grant will cover most, or all, of their needs.
• The top 20% of earners need life cover of about R4.5m. Typically, these earners have life cover of R2.1m, leaving a gap of R2.4m.
David Kop, the head of public policy and consumer affairs at the Financial Planning Institute, says it is when times are tough that the true value of having a professional financial planner is realised.
“You may be considering cutting back on expenses such as life cover to make ends meet. However, this can be detrimental to your financial plan. This is where you should sit down with your financial planner to help restructure your budget and make informed decisions on how to manage your current spending, while providing for your future spending,” Kop says.
TIPS ON BUYING LIFE AND DISABILITY COVER
The issues you should take into consideration when buying disability cover include:
• Your cover should pay a benefit that equals between 50% and 70% of your income; and
• If your plan has short-term and long-term disability cover, make sure you know how they work together. Many plans require you to submit a claim for a short-term disability benefit before you can claim for a long-term disability benefit.
When deciding how much cover you need, work out the income your family will need after you die, or the monthly income you and your family will need if you become disabled and cannot work. This may exclude your mortgage bond, vehicle and other debt repayments if you have credit life assurance or savings that can be used to settle these liabilities.
One of the main reasons people take out life cover is to protect their children’s financial future. When you have a new child, or the number of your dependants increases, make sure that your policy is amended to provide for additional cover.