Death and disability insurance shortfall increases to R24 trillion
There is no doubt that the global financial crisis had a significant impact on the public. In fact, it is a subject I have often harped on about. But are we really aware of the effects that the crisis had on our lives? Are we fully prepared for an unfortunate event, such as death or disability which could have a devastating effect on families and dependants?
A natural coping mechanism during an economic crisis is to look at your budget and target areas where necessary cuts could take place. Items which were regarded as grudge purchases really become grudge purchases and unfortunately insurance products get put into that box very quickly.
However, the need for insurance can never be underestimated and can be perfectly summed up by Mutual & Federal CEO Raimund Snyders' comments. At the recent Mutual & Federal broker road show he pointed out that insurance is not always seen as a vital component in our everyday lives until it comes down to the crunch where it then becomes the most important.
When we consider this, perhaps one of the most shocking recent statistics is that the South African death and disability shortfall has increased to R24 trillion in 2013.
Unpacking the numbers
These results were presented in the 2013 Life and Disability Insurance Gap Study which was conducted on behalf of the Association for Savings and Investment South Africa (ASISA) by True South Actuaries & Consultants in partnership with the UNISA Bureau of Market Research (BMR).
ASISA CEO Peter Dempsey points out that it is distressing to see that the life insurance shortfall increased to R9.3 trillion over the past three years, while the gap in disability cover now stands at R14.7 trillion. He adds that this translates to an average life cover shortfall of R700 000 per average income earner and a disability cover shortfall of R1.1 million.
Dempsey says the first study in 2007 established that South African earners were underinsured by an estimated R10 trillion. Since this was the first study of its kind in South Africa, data limitations impacted on the accuracy of the findings. More detailed and refined data was available three years later and as a result the findings of the 2010 study showed an insurance gap of R18.4 trillion.
"The study shows that over the past three years the insurance gap widened by almost 10% a year, from R18.4 trillion in 2010 to R24 trillion in 2013,” says Dempsey.
Understanding the gap
Dempsey says a figure of R24 trillion is meaningless unless its implication is made relevant to the average earner and the members of the household that he/she supports financially.
"The sad reality is that only a very small minority of South Africa's 13 million earners between the ages of 18 and 65 are adequately covered for death and disability. The majority of families will be forced to drastically cut their living expenses if an earner of the household dies or becomes disabled,” says Dempsey.
While this will have a significant impact on lower to middle income earning households, there is a significant danger in thinking that these are the only households which will be affected by this. Because of the quality of life they have created for themselves, higher income earners carry their own risks.
"The insurance gap increases steeply as income increases, because the higher an earner's income bracket, the more life and disability cover is required to maintain living standards, should the earner die or become disabled.”
Predictably, it is the middle income earning households – where the income earners earn an average of R12500 per month - who will suffer the worst effects of a sudden death or disability. And the corrective measures that these households will have to put in place will not be easy to achieve.
"The current average insurance shortfall for this group means that households supported by these earners would need to source an additional income of R10 000 a month should one of the earners die and R20 000 a month to plug the gap should one of the earners become disabled. The alternative would be to cut household expenditure by 36% in the event of death or by 46% should the earner become disabled,” says Dempsey.
The study also shows that while earners in the lowest income bracket are likely to have a small life cover shortfall of R100 000, the reverse is true for disability insurance.
This is because the Government disability income grant is very effective at replacing lost income in the lower income brackets. Most South Africans earning less than R1 500 a month would not have a need for disability insurance.
Dempsey says according to the study, the only group of people likely to have sufficient life and disability cover are high-income earners older than 55. This is because this group has generally benefited from group life and disability cover through years of membership of an employer's pension fund.
Closing the gap
Dempsey says underinsured earners and their households are faced with three choices:
- Closing the gap by buying sufficient life and disability cover;
- Reducing household expenditure should one of the household's earners die or become disabled;
- Or increase the monthly earnings of the household should something happen to one of the main earners.
Closing the life and disability insurance gap would require South African earners to spend on average an additional 2.9% a year of their personal income on life cover – which equates to R45 billion a year - and 1.8% a year on disability cover, which equates to R28 billion a year.
Editor's Thoughts:
This is a clear indication why insurance should be made a priority and not an afterthought. It is understandable that the grudge purchase value of insurance increases during a time of crisis, but the fact that your family may never recover from an incident should be a deterrent against this. Perhaps the public needs to be more aware of this gap and advisers can use this as a unique selling point for policies. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.
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