Most South Africans do not have enough cover protecting them or their family against death or disability before retirement. Picture: LIGHTFIELDSTUDIOS
Most South Africans do not have enough cover protecting them or their family against death or disability before retirement. Picture: LIGHTFIELDSTUDIOS

On average, South Africans are short R2.2m in cover, the latest SA life and disability gap study shows.

The shortfall in life and risk assurance cover for the country as a whole is growing, with the insurance gap reaching almost R34.7-trillion for its 15.6-million income earners. This gap has widened by almost R6-trillion, or 6.4% a year, since the end of 2015, according to the 2019 Insurance Gap Study of the Association for Savings and Investment SA (Asisa).

The study, conducted every three years by Asisa in partnership with True South Actuaries and Consultants, measures the difference between the risk cover SA income earners have in place and what they actually need.

The insurance need is defined in the study as the amount of money you or your family would need to maintain the same standard of living prior to you dying or becoming permanently disabled and losing your income. It does not take into account any debt, such as home and car loans, or the additional once-off costs associated with disability, such as adapting your home for a wheelchair.

When it comes to disability cover, the average SA earner should have had R2.3m worth of cover in place in 2018 in order to maintain his or her lifestyle.

Rosemary Lightbody, senior policy adviser at Asisa, says should an income earner die, the average household would have required a life cover payout of at least R1.6m in 2018 to maintain the family’s standard of living, but they were short of R1m in cover.

When it comes to disability cover, the average SA earner should have had R2.3m worth of disability cover in place in 2018 in order to maintain his or her lifestyle, or the family's lifestyle, following permanent disablement. But with only R1.1m disability cover in place, South Africans on average had a disability cover gap of R1.2m.

The shortfall in life cover of R1m and in disability cover of R1.2m means the average income earner has a combined insurance gap of R2.2m. 

Lightbody says the need for disability insurance is higher than for life assurance because household expenses tend to decrease when a family member dies, while disability tends to increase household expenses due to the needs of a disabled person.

The loss of an earner can have devastating financial implications for families if no provision is made for adequate life cover, Lightbody warns.

“Very often this results in significant financial hardship for families, in addition to the emotional trauma caused by the loss of a loved one,” she adds.

Sufficient cover

 

To solve the insurance gap in 2018, the average earner would have needed to spend only an additional 4.6% of their monthly after-tax income to buy adequate life assurance cover, and an additional 2.6% to close the disability insurance gap, Lightbody says.

The implications for families without sufficient cover in place were quantified in the study.

Without adequate life cover in place, the average family would be forced to generate additional monthly income of R5,362 to maintain their standard of living following the loss of an income earner. The alternative would be that the family would need to reduce their household expenditure by 32%.

With the shortfall in disability cover, the average family would be forced to generate an additional monthly income of R6,475 to maintain their standard of living if an earner becomes disabled, or they would need to cut household expenses by 24%, she says.

Lightbody says that since 9-million of SA’s 15.6-million earners are younger than 40 years, the majority of the country’s earners are likely to be significantly underinsured.

The tragedy of the underinsurance in this sector is that after death or disability, younger earners or their families, who in turn typically have young families, need to rely on the income from their insurance for much longer than older earners who are closer to retirement.

Since young earners are more likely to be heavily indebted with mortgage bonds and car payments in addition to having to fund children’s education and save for their retirement, protecting their future income in the event of disability is critical, she says.

While young adults rarely think about the possibility of dying or becoming disabled and cannot see the point of buying life and disability cover, the reality is that most people will need such cover at some stage of their lives, whether it is to cover home or car loan repayments, support their dependants or for estate planning purposes later in life, Lightbody says.