Risk cover gap puts fam­i­lies at risk of ruin

The huge short­fall in the cover that South Africans should have to in­sure them­selves and their depen­dants against death and dis­abil­ity has grown since 2007. Bruce Cameron re­ports The ear­lier you buy, the less you are likely to pay

Weekend Argus (Saturday Edition) - - GOODPOSTER - ‘LIFE WITH CAMERON’: PAGE 2

The vast ma­jor­ity of 13 mil­lion em­ployed South Africans are ig­nor­ing the fact that, if they die pre­ma­turely or are per­ma­nently dis­abled, their fam­i­lies will not be able to main­tain their stan­dard of liv­ing – in fact, most will be left des­ti­tute.

On av­er­age, most work­ing South Africans be­tween the ages of 18 and 65 are un­der-as­sured by 62 per­cent for death and by 60 per­cent for dis­abil­ity. For the av­er­age in­come earner, this trans­lates into a short­fall in life cover of R700 000 and a short­fall in dis­abil­ity cover of R1.1 mil­lion.

As a re­sult of un­der-as­sur­ance, most of the 173 000 house­holds that lost an in­come earner this year be­cause of death or dis­abil­ity are likely to be suf­fer­ing se­vere fi­nan­cial hard­ship.

The short­fall in risk life as­sur­ance is re­vealed in re­search com­mis­sioned by the As­so­ci­a­tion for Sav­ings & In­vest­ment SA (Asisa). The study, which is con­ducted ev­ery three years, was un­der­taken by True South Ac­tu­ar­ies and Con­sul­tants in part­ner­ship with the Bureau of Mar­ket Re­search at the Univer­sity of South Africa.

Peter Dempsey, deputy chief ex­ec­u­tive of Asisa, says the po­si­tion has be­come worse since the first study was com­pleted in 2007.

“The sad re­al­ity is that South Africans are crit­i­cally un­der­in­sured for death and dis­abil­ity.”

In 2007, the gap in death and dis­abil­ity as­sur­ance was es­ti­mated to be R10 tril­lion; in 2010, it was about R18.4 tril­lion. It is now R24 tril­lion.

So, if you are Mr or Ms Av­er­age and the main bread­win­ner in your fam­ily dies or is dis­abled to­day, you will ei­ther have to slash your liv­ing ex­penses by be­tween 30 and 34 per­cent, on av­er­age, or earn more – an ex­tra R3 177 a month if the bread­win­ner dies or an ex­tra R4 696 a month if the bread­win­ner is The younger and healthier you are when you buy risk life as­sur­ance, the more likely it is that you will pay a lower pre­mium.

But if you leave it un­til you are mid­dle-aged or older, you may not be able to buy as­sur­ance, or the cover may be lim­ited and ex­pen­sive.

Peter Dempsey, deputy chief ex­ec­u­tive of the As­so­ci­a­tion for Sav­ings & In­vest­ment SA, says if you de­velop a se­ri­ous med­i­cal prob­lem later in life, or en­gage in dan­ger­ous ac­tiv­i­ties, you may find it dif­fi­cult to find a life as­surer that is will­ing to in­sure you. And if you do, ex­pect to pay hefty premi­ums – the higher the risk you pose to the life com­pany, the more your life cover will cost.

Life cover is im­por­tant, but dis­abil­ity cover is es­sen­tial, Dempsey says. “Even if you do not have any depen­dants, you need dis­abil­ity cover to pro­vide for your own needs in case you lose the abil­ity to earn a liv­ing.” dis­abled and un­able to work.

Clos­ing the as­sur­ance gap will re­quire in­come earn­ers to spend, on av­er­age, an ad­di­tional 2.9 per­cent of their in­come a year on life cover (a to­tal of R45 bil­lion a year) and an ad­di­tional 1.8 per­cent a year on dis­abil­ity cover (R28 bil­lion a year).

True South says that, be­cause earn­ings (which drive the need for risk life as­sur­ance) and cover have in­creased at sim­i­lar rates over the past three years, the as­sur­ance gap as a per­cent­age of the as­sur­ance need re­mained largely un­changed, at about 60 per­cent.

The younger you are when you be­come dis­abled, the higher the lump sum ben­e­fit you will re­quire to sur­vive fi­nan­cially, he says.

“The older you are, the greater the like­li­hood that you will have made pro­vi­sion for re­tire­ment. A young per­son who be­comes dis­abled and can no longer earn an in­come would have to rely on one lump-sum dis­abil­ity ben­e­fit pay­ment for a life­long in­come.”

Dempsey says it is im­por­tant that you ob­tain ad­vice from a qual­i­fied fi­nan­cial ad­viser when de­cid­ing how much cover you need. Your de­ci­sion will be in­flu­enced by how much you can af­ford to pay in premi­ums, your num­ber of depen­dants, your life­style, your debts, and ex­ist­ing death and dis­abil­ity cover.

“Your ad­viser should also help you to re­view your life and dis­abil­ity cover reg­u­larly or when your cir­cum­stances change, to make sure that you are not sud­denly un­der­in­sured,” he says.

It is not low-in­come earn­ers who are most at risk to a short­fall in as­sur­ance, but peo­ple who earn more than R150 000 a year.

The av­er­age as­sur­ance short­fall for this group means that house­holds would need to find an ad­di­tional R10 000 a month should an earner die or R20 000 a month should an earner be­come dis­abled. The al­ter­na­tive would be to cut house­hold ex­pen­di­ture by 36 per­cent in the event of a bread­win­ner’s death or by 46 per­cent should the bread­win­ner be­come dis­abled.

The study shows that, al­though peo­ple in the low­est in­come bracket are likely to have a short­fall in life cover of R100 000, the re­verse is true for dis­abil­ity as­sur­ance. This is be­cause the state’s dis­abil­ity grant is very ef­fec­tive at re­plac­ing lost in­come in the lower-in­come brack­ets. Most South Africans who earn less than R1 500 a month do not need dis­abil­ity as­sur­ance.

Dempsey says that, ac­cord­ing to the study, high-in­come earn­ers older than 55 are the only group of peo­ple likely to have suf­fi­cient life and dis­abil­ity cover. This is be­cause they ben­e­fit from group life and dis­abil­ity cover as a re­sult of be­long­ing, for many years, to an em­ployer-spon­sored re­tire­ment fund.

Sin­gle peo­ple are most likely to be over-as­sured, and top earn­ers and bread­win­ners with a ter­tiary ed­u­ca­tion are more likely to have enough life as­sur­ance.

The peo­ple who are most ex­posed to po­ten­tial fi­nan­cial dis­as­ter, par­tic­u­larly if they were to be­come dis­abled, are those un­der the age of 30.

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