Are you at risk with too little life cover?
Insurance body identifies R2.2m death and disability gap
The average South African earner needs to spend about 7% of monthly after-tax income on topping up their life and disability insurance to avoid their family having to cut their monthly expenses by about a third should he or she no longer be able to earn an income.
The average South African earner is under-insured for death and disability by an average of R2.2m, says the latest Life and Disability Insurance Gap study by the Association of Savings and Investment SA (Asisa).
The study says the average South African needs to take additional death cover at an average cost of about 4.6% of after-tax monthly income, and 2.6% for disability insurance, to make up the shortfall.
But averages can be misleading because the cost can range from 5.2% if you earn more than R17,700 a month to as much as 13% if your monthly income falls between R4,665 and R8,542 a month.
If you, like most South Africans, are massively underinsured with life and disability cover in the false belief that nothing bad will ever happen to you, think again.
According to life insurer FMI's 2019 risk statistics, a 25-year-old man has a 92% chance of having a temporary injury or illness during his working career, a 37% chance of a critical illness and a 15% chance of a permanent disability.
Hennie de Villiers, deputy CEO of Sanlam Personal Finance, says that as a 35-year-old you have a 5% to 15% chance of dying before the age of 60 and a 4% to 9% chance of becoming permanently disabled.
The chance of dying before age 60 when you
In addition, at this age, your chance of suffering a temporary disability is significantly higher, at between 60% and 80%.
"Even though some of these probabilities may seem low, the financial impact of death or disability can be severe," he says.
Rosemary Lightbody, senior policy adviser at Asisa, says the under-40s are the most vulnerable to shock events and are taking the biggest gamble by being underinsured.
If you are under the age of 40, you are likely to have a partner and dependent children, parents or other relatives who rely on your income.
"The sad reality is that the benefit of sacrificing a small portion of your income to protect your family from certain financial hardship should something happen to you only becomes clear once a devastating life event has taken place and you are no longer in a position to fix it," says Lightbody.
While the amounts needed to resolve the insurance gap for all South Africans are daunting, your individual circumstances may be different and with trade-offs you may be able to make a big difference to a potentially financially disastrous situation if you at least do something now.
Industry experts say consulting a financial adviser who can calculate how much cover you require based your circumstances and analysis of your financial situation is vital.
As a first step to assess whether you are indeed underinsured you can use some rule-of-thumb calculations.
To calculate how much cover you require, first distinguish between temporary disability, permanent disability and life cover, and under what circumstances and how a benefit will be paid.
Johann Strauss, a director and certified financial planner at Cape Town financial advisory firm RFAdvice, says temporary disability cover is most commonly paid out as an income benefit for up to 24 months or until you can resume your occupation.
On the other hand, permanent disability cover will pay once your disability is declared permanent by your insurer.
The probability mayHennie de Villiers
seem low, but the
of death or
disability can be severe
Sanlam Personal Finance deputy CEO
This cover can be purchased as a lump sum or as a monthly income payout at claim stage.
The insurer will assess if the disability qualifies for the permanent disability benefit and the income benefit typically supplements the temporary disability cover after two years until your chosen retirement date.
A combination of lump sum and income disability is usually advisable, he says.
To assess how much temporary disability cover you require, you need to establish your monthly cost of living.
For most people this would be equal to their full income less tax payable, which is also the maximum amount of income cover you are allowed to have, he says.
Lump-sum cover is for settling your debts and making lifestyle changes to, for example, your house and car if you are disabled.
Permanent income cover can replace your income if you become permanently
disabled and unable to perform your occupation.
Strauss says it is critical that you insure yourself for your own specific occupation instead of a reasonable or similar occupation.
If you have enough lump-sum cover to settle your debts and make the necessary lifestyle changes should you become permanently disabled, you can reduce the amount of permanent income disability to cover your cost of living less your monthly debt-servicing payments.
The primary purpose of life cover, on the other hand, is to provide security to your financial dependants should you die.
You can calculate a ball-park figure of how much life cover you need to take care of your family after your death by determining the portion of your salary your family depends on each month, says Strauss.
Consider any future needs such as education and if you are employed check if you have group life cover.
Convert the monthly amount to an annual one by multiplying by 12. Then divide it by five and multiply by 100 as this will give you the sum from which you can draw 5%, the assumed long-term safe withdrawal, he says.
This should give your family the required before-tax annuity income if their drawdown is 5% of the capital each year if the funds are invested wisely and investments assumptions hold true. If you have debt, the amount of the debt should be added to the figure, says Strauss.
Brad Toerien, CEO of FMI, says unfortunately most South Africans get their priorities mixed up when it comes to insurance.
What many fail to realise is that temporary disability is the most likely risk that can prevent you from earning your income and this applies to all age groups, he says.
Loved ones maybe left worse off
● SA’s life and disability gap among its 15.6-million income earners had widened to R34.7-trillion by the end of last year —which is 6.4% a year higher than at the end of 2015.
● If the average earner does not make provision for the R2.2m shortfall in life and disability insurance revealed by the study, their families will have to cutmonthly expenses to maintain their standard of living following the deathor disability of the earner. A death will trigger the need to cut expenses 32%,and if the earner becomes disabled, the family will need to cut their monthly budget by 24%.
● The other option for a family is for them to earn extra income to maintain their lifestyle. They will require between R5, 362 and R12,502 moreafter tax a month if the earner should die, and R6.475 to R17,506 extra a month should he/she be disabled.