September is Life Insurance Awareness Month, an international awareness campaign aimed at encouraging the public to re-evaluate their life insurance needs – whether they need it, how much and what types of insurance would be most appropriate to their life stage. Recent studies have shown that overall, South African families are underinsured by a massive R10 trillion.
Andrew Warren, Business Develompent Executive in the insurance business at Liberty Life says that one area where individuals often fall short is in the protection of their income. “We are all exposed to the risk of disability or dread disease and the resultant loss of potential future income. South Africans are definitely underinsured when it comes to disability cover. A recent Life Office Association Insurance Gap Study revealed that SA households would need around R12,3 trillion to maintain their living standards should one of the breadwinners become disabled. However, actual cover at that time was only for around R6,5 trillion, leaving a significant disability insurance gap. This shortfall in income protection insurance is across all age groups, including the younger and older generations.”
In order to retire successfully, an individual needs to convert income earned over his or her lifetime into assets which can then provide an income stream after retirement. This income stream should ideally be as high as the highest level achieved during that individual’s working life to ensure that the individual is able to maintain his/her standard of living.
The key here is that the primary income stream – being the one which will be converted to wealth over the individual’s economic life – must be protected. The objective of income protection insurance is to secure or protect this primary potential income stream over the working life of the individual as this income is used to accumulate assets which will generate a secondary income stream post-retirement.
Warren highlights that income underinsurance is prevalent among younger individuals. “One instinctively thinks that income protection in one’s younger years is not required. Young people believe they do not need to protect their future income streams because the chances of death or disability at this time in their lives is far lower. Another mistake is that because they are starting out on their careers, they believe they have very few assets at that stage which are in need of protection, as their primary income has not yet been converted into secondary income generating assets.”
Warren says that although the probability of a life-changing event occurring in the younger years is less, individuals must realize that the chances of death or disability are random but that they can happen at any time. “If such a disruptive event does occur during the earlier stages of life, the consequences are far more severe as a much longer time period for primary income generation has now been destroyed.”
These disruptive events could come from a number of sources such as death, disability, or disease. Although such disruptive events are random and largely outside of one’s control, it should be highlighted that in South Africa, for the South African population as a whole, the chances of an unnatural mortality event occurring such as a motor vehicle accident or crime event are seven times higher than that for the UK.
Warren says that younger people embarking out on their careers overlook that their biggest and most valuable asset is their future potential income. “It is essential that this asset be protected through effective insurance. Even though the chances of a disruptive event may be slim, the consequences if one does occur at the early stages of one’s working life are most severe. The future potential income asset of someone in their early 30s is far greater than someone in their mid 50s.”
Even the higher income earners, being those older than 55 who have successfully built up a wealth base over their careers, tend to have inadequate income protection cover. Warren says that equally important is that the older individuals ensure they have appropriate insurance to protect their secondary income generating assets, being those built up over time from the primary income earning stream. “The events that threaten the secondary income stream are factors such as longevity, asset disruptions such as stock market crashes and personal insolvency. There is a tendency to reduce income protection insurance as individuals get older. However, the secondary income generating assets and their potential income streams also need as much protection as the primary income stream of the early years.”
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