Insure income, forget life cover
Many South Africans overestimate their risk of permanent disability, critical illness or death, but underestimate their risk of temporary illness or injury, a survey has found.
This suggests people may have an incorrect mix of risk cover; they may have life cover even though they don’t need it, or may be underinsured for events that are most likely to affect them.
According to FMI’s #RealityCheck Consumer Survey, 48% of the almost 700 people surveyed considered life insurance as mere death cover.
FMI CEO Brad Toerien says people generally need more disability cover than life cover. If they are disabled, they need to provide for themselves and their families, but if they die there will be one less mouth to feed.
Yet, twice as much life cover is sold than disability cover. Consequently people don’t have the cover they need, or have life cover before they need it, Toerien says.
A young adult who has just started earning an income and doesn’t have debt or dependents yet often buys life cover even though there is no good reason for it (apart from fear that they might be excluded in future).
A total of 61% of respondents would choose an income benefit over a lump sum benefit. However, almost 80% of the disability cover sold in SA pays a lump sum, while nearly all critical illness and life cover pay a lump sum.
While a lump sum is helpful to settle debt or pay significant expenses, people often find it difficult to manage a large amount of money that needs to last a long time.
The survey suggests people don’t understand their risks. Twenty-five to 35-year-olds think they are five times more likely to die before age 65 than they are. “They overestimate the risk of death and underestimate the risk of an injury or illness.”
According to FMI’s claim statistics, 70% of people will have injury or illness in their working career that will stop them from working (at least temporarily).
For 25-year-olds, there is an 86% chance of a temporary injury or illness and an 8% chance of a permanent injury or illness, yet people generally start out with life cover, add critical illness cover later and only then get income protection, he says.
The survey found that inability to earn an income for three months would be devastating to most South Africans. Two-thirds of respondents indicated they would run out of money.