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Income Earners underinsured for death and disability

The families of South Africa’s 14 million income earners face a combined insurance shortfall of R28.8 trillion should these breadwinners die or become disabled.

This amounts to an insurance gap – the difference between actual risk cover in place and the insurance need – of R2.1 million for the average South African earner. The insurance need is the amount of cover required to meet the financial need created by a death or disability event.

ASISA measures the life and disability insurance shortfall in South Africa every three years in partnership with True South Actuaries & Consultants.

The Gap Study is premised on the assumption that households would want to maintain their standard of living after a breadwinner has died or suffered disability. It further assumes that the need extends to retirement age only. The Study did not take into consideration any additional short-term expenses related to the risk event, such as funeral costs, medical costs and structural changes to homes and cars in the case of a disability event.

Models by the Actuarial Society of South Africa show that some 140 000 income earners are expected to die in 2016, while more than 46 000 are likely to become disabled this year, which will leave thousands of families destitute before the year is over.

Life Cover Gap

Peter Dempsey, deputy CEO of the Association for Savings and Investment South Africa (ASISA), says the 2016 Gap Study indicates that only 41% of the insurance need of the country’s income earners is currently met by actual cover. The families of the country’s income earners are facing a death insurance gap of around R12.9 trillion since the extent of actual cover in force amounts to only R7.4 trillion, while the actual need is in the region of R20.2 trillion.

Average Life Insurance Gap

Average net annual income Average gap per person Total gap for all earners Additional monthly income (net of tax) needed post death Or cut household expenses by
Poorest 20% earners Up to R26 310 R61 055 R171 billion R330 7%
Next 20% earners R26 311 to R54 272 R323 548 R906 billion R1 751 28%
Next 20% earners R54 273 to R102 305 R655 388 R1.8 trillion R3 546 41%
Next 20% earners R102 306 to R214 244 R1.2 million R3.3 trillion R6 349 38%
Richest 20% earners More than R214 245 R2.4 million R6.7 trillion R12 874 36%

Disability Cover Gap

Equally, in order to maintain their standards of living after a disability event, households would require insurance cover of around R28.9 trillion. However, the extent of actual cover in force amounts to only R13 trillion, leaving a disability insurance gap of around R16 trillion.

For the average individual income earner, this represents a life cover shortfall of more than R900 000 and a disability cover shortfall of over R1.1 million.

Average Disability Insurance Gap

Average net annual income Average gap per person Total gap for all earners Additional monthly income (nett of tax) needed post disability Or cut household expenses by
Poorest 20% earners Up to
R26 310
-R182 930 -R512 billion -R959 -15%
Next 20% earners R26 311 to R54 272 R221 815 R621 billion R1 163 14%
Next 20% earners R54 273 to R102 305 R761 433 R2.1 trillion R3 991 36%
Next 20% earners R102 306 to R214 244 R1.6 million R4.5 trillion R8 406 39%
Richest 20% earners More than R214 245 R3.3 million R9.2 trillion R17 283 32%

Gap Study Relevance

The Gap Study breaks down the shortfall numbers into various categories and numbers that people can relate to. The breakdown in the tables above will to assist financial advisers and other stakeholders in the savings and investment industry to highlight the critical importance of adequate death and disability cover to consumers.

While consumers in the higher income brackets generally think that they are sufficiently covered for shock events like death and disability, the Gap Study shows that this group is most critically underinsured.

For example, an earner that finds her/himself in the top 20% of South African earners with average annual net earnings of R500 000 would typically need life cover of almost R4.5 million. However, according to the Gap Study, such an earner is likely to only have life cover of R2.1 million, leaving an average insurance gap of almost R2.4 million.

Furthermore, such a high-income earner would typically require disability cover of almost R6 million. However, they are likely to only have disability cover of R2.7 million in place, leaving an average insurance gap of almost R3.3 million.

The current average insurance shortfall for this group means that households supported by these earners would need to source an additional income of almost R13 000 a month should one of the earners die and more than R17 000 a month to plug the gap should one of the earners become disabled.

The alternative would be to cut household expenditure by 36% in the event of death or by 32% should the earner become disabled.

Closing the Gap

Dempsey says underinsured earners and their households are faced with at least three choices:

  • closing the gap by buying sufficient life and disability cover
  • reducing household expenditure should one of the household’s earners die or become disabled, or
  • increasing the monthly earnings of the household should something happen to one of the main earners.

These figures very clearly illustrate the important role of financial advisers in creating awareness of the need for life and disability cover.

I would hazard a guess that, for every experienced adviser the industry loses, it needs to make at least ten new appointments to make sure that, in five years from now, the loss is balanced out. Unfortunately, in this time, the very public, whom legislative changes aim to protect, will be the losers.

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