The Five Main Life Risks – Life Insurance Awareness Month prompts a review of cover
The two core needs of clients that the life insurance industry aims to meet are to protect them against risk and to assist them in accumulating wealth.
Andrew Warren, Business Development Executive from Liberty Life explains that there are five significant risks that can impact an individual’s wellbeing and lifestyle over their lives. “These are the risks of dying too soon, living too long, an event that diminishes the full income potential of the individual, becoming disabled and the eroding effects of tax and inflation.”
Warren says that if an individual dies too soon, his or her dependents lose the future potential income asset of that breadwinner. “The consequences of dying too soon are more severe if the individual dies earlier on in his or her working life because the future potential income that this individual is going to earn is far greater when one is younger.
“South Africans are grossly underinsured when it comes to risk cover. A 2006 Life Offices’ Association study shows that SA families would need total life insurance cover of around R7,9 trillion in order to maintain their lifestyle following on from the death of a breadwinner. The total cover in SA at the moment is R3,5 trillion, leaving an enormous shortfall.”
At the other end of the spectrum, an individual may live too long. In this case, it is not the future earning potential asset which is at risk, but rather that income provided by the accumulated wealth will run out and that the wealth itself will have to be used for living expenses. This problem can be exacerbated by health cost increases exceeding inflation when one is in retirement. In these cases the individual’s entire lifestyle becomes compromised. Also, advances in healthcare are resulting in people are living longer. This is particularly evident in developed countries and in sectors of developing countries where there is access to world-class healthcare, and the risk that older individuals outlive their savings is now quite real.
The third risk, a reduced ability of an individual to reach their full earnings potential, is usually triggered by a health event that prevents the individual from working at full capacity. This event does not automatically lead to disability but it does impact on the individual’s income-generating potential. For example, a heart attack may lead to the individual having to cut back on workload, which could mean no further promotions or even less income if the work is dependent on certain inputs such as hours.
The fourth risk is the risk of becoming disabled. Becoming permanently disabled means the individual ceases work altogether and the future potential income stream gets completely cut off from the time of that life-changing event. This event has the same impact as death, with the extent of the loss being the same, except the individual also needs to be able to cover his costs of living with this disability and be able to provide for his dependents. Living with the disability usually also results in an increase in ordinary expenses such as medical costs, nursing requirements and possible renovations to property.
The risks described above come from both external (accidents, violence, social circumstances and acts of nature) and internal sources (hereditary, past exposures to the environment and disease, and lifestyle). Warren says, “Individuals can influence these risks through lifestyle choices by changing their actions and habitual behaviors. But there are always risks that cannot be avoided and managed completely, and sound financial planning coupled with the products provided by life insurers will enable individuals to eliminate the risks that they themselves cannot manage.”
Individuals must also be aware of the need to protect against the fifth risk, the effects of tax and inflation eroding purchasing power of their accumulated wealth. In most cases wealth is accumulated over an individual’s working life and this wealth should enhance the overall lifestyle of that person. Once again, sound financial advice, coupled with the tax efficient investment vehicles offered by insurers, will assist people manage their wealth risks.
With September being International Life Insurance Awareness month, Warren says it is an opportune time for individuals to revisit their life insurance needs. “People should reassess their cover with the objective of protecting themselves and their dependents against the various risks which threaten income earning potential and the adequacy of income, before and after retirement. One should revisit core insurance needs and consider all the events that have occurred over the years, such as a new dependent or increases in income, to ensure risk cover is appropriate.”
