With the wide disparity in income between those at the top and those at the bottom of the income scale in South Africa, knowing the average insurance gap of all income-earners might not be particularly helpful. For this reason, the Asisa’s 2022 Life and Disability Insurance Gap Study breaks down the 14.3 million income-earners into five groups, each of equal number (2.9 million).
The first group represents the 20% poorest individuals – those who earn up to R33 154 a year –within the universe of earners. The second quintile represents those who earn from R33 155 to R67 005; the third, those who earn from R67 006 to R118 195; the fourth, those who earn from R118 196 to R246 922; and fifth quintile, those who earn more than R246 923 a year.
Let’s consider the insurance gap of the richest 20%. According to the gap study, the average individual in the top quintile earns R713 428 a year and is likely to be 42 years old.
According to the study, such an individual would typically need life cover of almost R5.3 million. However, he or she typically has life cover of about R3.174m, comprising retail insurance of about R2.027m and group life cover of about R1.147m.
The difference between the insurance need and the actual cover leaves a life insurance gap of some R2.105m. (The calculation assumes an income replacement requirement or ratio of 54%.)
This same person typically needs disability cover of more than R7.161m. However, he or she probably has disability cover of more than R3.449m, comprising some R1.487m in retail insurance, R1.912m in group cover and R49 083 in government grants.
The difference between the insurance need and the actual cover leaves a disability insurance gap of some R3.712m. (The assumed replacement ratio is 71%.)
How to close the gap
What can this individual – or someone in any of the income categories – do to address his or her insurance shortfall?
The gap study says there are only three practical responses:
- Buy additional insurance;
- Reduce expenses after death or disability; and
- Replace the income lost following an income-earner’s death or disability.
The average earner in the top quintile would have to spend an additional 2.7% of their monthly pre-tax income to purchase adequate life insurance. The average across all income groups is an additional 4.5% of monthly pre-tax income, said WS Nel, actuarial research lead at True South Actuaries and Consultants.
But without adequate life cover in place, the average family in the top income quintile would be forced to generate additional monthly income of R11 776 (average across all income groups: R5 630) to maintain their standard of living following the loss of an income-earner. Alternatively, it would have to reduce household expenditure by 27% (average across all income groups: 30%).
The disability of an income-earner in the top quintile would force the average family to generate an additional monthly income of R19 775 (average across all income groups: R7 443) to maintain their standard of living. Alternatively, the family would have to reduce household expenditure by 38% (average across all income groups: 33%).
On the other hand, it would cost the income-earner an additional 2.1% of their pre-tax monthly income to close the insurance gap (average across all income groups: 2.6%).
“The additional income required by a household following the permanent disability of a breadwinner is higher than when an income earner dies, because the disabled family member still incurs expenses until retirement,” said Nel. However, the cost of buying additional cover is generally lower because disability insurance is cheaper than life cover.
Nel said the financial impact of a disability on the country’s poorest income earners and their households (those earning R33 154 or less a year) is often less severe, because government disability grants cover the full disability insurance needs of these South Africans.
Read: Insurance gap increases only slightly, but not for a good reason
