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Youth month highlights the need for expanded financial literacy

22 June 2020 Solvency Insurance

It’s imperative that young South Africans are taught how to take advantage of new, technology-driven financial services offerings, in addition to receiving basic financial literacy education...

A significant percentage of South Africans in full time employment are unable to protect themselves against the risk of unexpected events by taking out insurance policies and are also increasingly struggling to save money to guard against a future rainy day.

According to December 2019 article in BusinessTech, National Credit Regulator (NCR) statistics show that 84% of South Africans who earn R15,000 a month or more have some form of debt – with unsecured loans and credit cards the fastest-growing types of debt. The same article cites a survey by the Debt Counsellors Association of South Africa of consumers with bad debt. The survey found that many are borrowing for daily necessities such as food and transport, while also cutting back on medical aid and insurance policies.

‘When young South Africans enter the working world the numbers often just don’t add up for them,’ says Mutoda Mahamba, CEO and founder of Solvency, an innovative new insurance product of GENRIC Insurance Company Limited (FSP 43638), an authorised Financial Services Provider and registered Short-term insurer. ‘Yes, you know you should have insurance, but what if your salary can’t pay for it?’

South Africa’s COVID-19 reality means that in 2020 a lot of workers’ salaries barely cover the cost of rent, food, transport, childcare and education. In a recessionary environment, crucial risk management tools like short term insurance are simply unaffordable for many, while saving and investing money for retirement is equally out of reach.

‘Financial literacy programmes are common in high schools and universities, and our new generations are taught the theory of the benefits of financial products, the importance of savings, how compound interest works and why insurance matters,’ explains Mahamba. ‘The problem is that the things you’re taught about at school just don’t seem possible when you get that first salary cheque.’

And yet, as we all know, accidents do happen. Even a small car accident can have devastating consequences, which last for years, for someone with a full-time job but no insurance.

‘There’s a lot of risk in daily life, and if you can’t afford to take risk mitigation steps you are vulnerable to financial hardships, even when you have a good job,’ says Mahamba. ‘And risk mitigation isn’t just about things like insurance – it’s also about creating a financial nest egg that can help you and your family cope in an uncertain future.’

Mahamba goes on to stress the importance of South African schools expanding beyond financial literacy theory to include practical content that teaches our youth about the new options emerging in the marketplace, and how to take advantage of them.

‘There are a lot of new financial services brands in the market today that can help you manage risk despite scarce resources, but not enough people know about them,’ says Mahamba. ‘Our youth need to be taught the basic theory of financial literacy, but they also need to be educated as to these new developments and offerings. Insurance today is not the same as it was two or three years ago, and it’s crucial that our new generations understand this fact. The same goes for a lot of other financial products and services.’

Mahamba’s brand, Solvency, is a case in point. The Solvency solution offers crucial short-term insurance cover combined with the ability to save and invest seamlessly. It’s a unique product that helps South Africans protect themselves and their families against key life risks, while still saving for the future.

Solvency clients can choose how much of their monthly car and household insurance premium (up to an average of 45%) is allocated to an Insurance Savings Account (ISA) in their name. This innovation operates in a similar fashion to a medical aid savings account. The decision on how much to allocate to the ISA is guided by how much excess the client chooses to pay in the event of a claim. Given that on average a short-term insurance consumer claims once every four years, and that the Solvency ISA is expected to earn money-market rates, the client soon achieves a position where the savings portion of their policy offers effective risk cover.

‘It’s easy to see how young South Africans might feel trapped in a vicious financial cycle,’ concludes Mahamba. ‘But the reality is that there are tools out there that allow people to break this cycle. It’s up to us as a society to make sure our youth understand how the new digital world can help them make choices that weren’t possible before.’

Quick Polls

QUESTION

Which of the following business models do you favour to achieve a sustainable succession outcome in your financial advice practice?

ANSWER

[a] I will find an independent financial planner to buy my business
[b] I will sell a portion of my advice practice to a large corporate
[c] I will join a large firm and give up my independence
[d] I will invite another independent financial planner to join me
[e] I will partner with a large firm
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