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The quest for perfect life and disability cover

15 February 2008 Gareth Stokes

South Africa has a long way to go before its population is adequately insured. This is the finding of an independent study commissioned by the Life Offices’ Association (LOA) and presented to the media at a function in Johannesburg on 14 February 2008. Th

A ten trillion rand gap

The bottom line is that South African families are underinsured by at least R10.328trn (the insurance gap). Pause a moment to let this conservative estimate sink in… And then consider that to remedy the situation (or close the gap if you prefer) families will have to commit to additional insurance premiums in the region of R34.4bn per annum. Joubert points out this would amount to between R1 330 and R2 322 per year per earner. The insurance gap was broken down further to illustrate shortfalls in the two main life insurance categories, death and disability. True South estimates a “life insurance gap of between R2.573trn and R4.325trn” while the disability insurance gap is put between R3.062 and R6.003bn.

In compiling the report True South had to make assumptions on population, employment, average household income and average household expenditure. The body of work was based on information supplied by LOA member companies and the University of South Africa Bureau of Market Research study titled: “Total household expenditure in SA by income group, life plane, life stage and product, 2004.” True South was at pains to remind the audience that a number of insurance covers were specifically excluded from the report. These included the Road Accident Fund, Workman’s Compensation and short-term insurance.

Total Household Expenditure was used as a base from which ideal levels of insurance cover for a given household could be determined. A basic model was then used to calculate how Total Household Expenditure would change post event (i.e. after a death or disability). This number was then used to illustrate the ‘ideal’ amount of household insurance.

Preservation versus ‘belt-tightening’

Two categories of ‘ideal’ cover were identified. True South defined a preservation scenario, in which “The household maintains its current living standards after the death/disability of the earner. Expenditure post death/disability changes only insofar as the event would lead to reduction or elimination of certain household expenses from that point forward.

The second, a ‘belt-tightening’ scenario was defined as follows: “The household drops its standard of living after the death/disability of the earner. Reduced spending for the two higher income categories is assumed, since their expenditures could typically include a high luxury component.”

But let’s take a quick look at how the report came to its conclusions. We will focus on the life insurance calculation, where a payout is triggered in the event of a death. First, an average earner was defined as having an annual income of R60 000. A number of technical adjustments were made to determine the post event income that would be required in each of the above scenarios. Post death income of R31 400 per annum would be required in the ‘belt-tightening’ scenario, and R42 000 in the preservation scenario. Using an annuity factor of around 13 the insured amounts would have to be R410 000 and R530 000 respectively.

Death versus disability

The situation is slightly different for disability because the income required post event is slightly higher. Obviously in this case the ‘insured’ is still around, and the household expenses cannot be reduced as much as in the event of a death. The report found that the average household would need R650 000 cover for disability in the ‘belt-tightening’ scenario, and R835 000 in the preservation scenario. These estimates of ‘ideal’ death and disability covers were then compared with the ‘actual’ cover held by households to determine the insurance gap.

Apart from the size of the gap, the report revealed a number of interesting dynamics across three income segments. While the gap for disability insurance is lower for the poorest 60% of earners (16%) than for the richest 20% (56%) the situation is reversed where life insurance is concerned. Here the gap for the richest 20% of earners (42%) is much lower than that of the 60% of poorest earners (88%).

The industry has plenty to do if it hopes to address the gap in future years. Joubert said the survey would probably be repeated on an annual basis to determine if any inroads were being made.

Editor’s thoughts:
Financial planners should ensure their clients are adequately covered for death and disability at an early stage in the planning process. This need is emphasised by a recent FAIS Ombud case in which a complainant tried to ‘sue’ a financial adviser for not putting adequate insurance policies in place. Do you pay enough attention to your client’s insurance cover during the financial planning process? Add your comments below, or send them to

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