South Africans have too little life and disability insurance

The most recent study on life and disability cover by the Association for Savings and Investment South Africa (Asisa) indicates that the untimely death of a breadwinner, or an accident that leaves them disabled, will be a true disaster for most families in SA. The typical wage earner simply does not have enough life insurance and disability cover.

Working with national statistics and the total amount of life and disability cover in force in the industry, Asisa calculated that the average worker in SA should have at least R1 million more life insurance than they have now, to avoid their household having to cut living expenses by 30% if the working spouse died or became disabled.

The study defined disability as total and permanent disability of an active earner and the disabled person is unlikely to return to work.

“The average South African income earner had a life insurance shortfall of at least R1 million and a disability cover gap of around R1.4 million at the end of December 2021,” according to the findings of the 2022 Life and Disability Insurance Gap Study published by Asisa in partnership with True South Actuaries & Consultants.

The study found that the 14.3 million income earners in SA had only enough life and disability insurance to cover 45% of the total needs of their households.

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Thus, the average SA household supported by at least one income earner would be forced to cut living expenses should the breadwinner die or become disabled and no other source of income can be found.

Statistics regarding SA notoriously high debt levels and the highest inflation rate in decades indicate that many households would be devastated if something bad had to happen to the head of the family.

Asisa does research about the life and disability insurance gap every three years. The insurance gap is defined as the difference between life and disability insurance cover someone has in place and the actual amount required by a household to maintain the same standard of living after the death or permanent disability of the income earner.

In addition to the noted shortfall highlighted in the research, Asisa notes that the need for capital and income after a risk event exclude immediate expenses related to the event such as funeral costs, medical costs and the cost of adapting a home and car for the needs of a disabled person.

Hennie de Villiers, deputy chair of Asisa’s committee for life and risk, says the aggregate insurance needs of SA households amounted to an estimated R62.9 trillion at the end of December 2021. SA has total insurance cover in place of only R28.6 trillion – leaving an insurance gap of R34.3 trillion.

“To give context to the sheer size of South Africa’s insurance gap, the consolidated government expenditure for the 2022/23 year as announced in the 2022 budget amounts to R2.16 trillion, of which R1.3 trillion is allocated to social spending.

“This means that the insurance gap of R34.3 trillion exceeds the national budget by around 15 times and government’s social spending by more than 26 times,” he says.

Bigger gap

Asisa’s study also shows that the insurance gap has increased since three years ago, if only marginally, by 0.2% per annum since 2018.

De Villiers says that the increase in the gap is worse than what the small annual increase between 2018 and 2021 indicates.

“There is no reason to celebrate. In the three years since the last gap study was done, the country’s income earners declined from 15.6 million earners at the end of 2018 to 14.3 million at the end of 2021.

“This means that 1.3 million people stopped earning an income. Since the gap study calculates the amount of life and disability cover needed to cover a loss of income following the death or disability of an income earner, a drastic reduction in the number of earners therefore also decreases the insurance need calculation,” says De Villiers.

“The three-year period since the insurance gap was measured at the end of 2018 included the two years during which the Covid-19 pandemic resulted in unprecedented economic hardship, which caused significant job losses.

“However, the pandemic also highlighted the importance of having risk cover in place like few other events in the history of SA. During this period many life insurers paid the highest number of claims in their history,” says De Villiers.

Presenting the research, Asisa said more than 1.98 million death claims were received in the 24 months from the beginning of April 2020 to the end of March 2022, the period that covered the four Covid-19 waves.

Life insurers paid out benefits of R120.5 billion to the beneficiaries who submitted these death claims.

“While these payments undoubtedly assisted to ease the financial burden brought about by such a tragic event, the gap study demonstrates that in many instances the payment would not have been sufficient. Many families probably had to make difficult financial adjustments during a time when they also had to deal with the loss of a loved one,” according to De Villiers.

Tragedies aren’t age-specific

In 2021, life insurers noticed an increased uptake of new risk policies by consumers and a drop in the policy lapse rate for the first time in many years. Despite this, Asisa says that the study proves that the life and disability insurance gap is growing.

“Insurance is a grudge purchase for many earners, as there are no immediate tangible returns for the money spent.

“Younger people, especially, tend to think that death and disability affect only older people and therefore they are less likely to spend their hard-earned money on insurance premiums.

“But Covid-19 highlighted that tragic life events do not differentiate by age,” says De  Villiers.

Asisa quotes figures from a 2021 study by the Continuous Statistical Investigation (CSI) Committee of the Actuarial Society of South Africa (ASSA) that showed that the impact of Covid had been surprisingly similar across all age groups. The number of claims against fully underwritten life policies almost doubled for young lives as well as for the older ages.

Younger income-earners most exposed

According to actuarial statistics, more than 500 families – young and old alike – are likely to suffer a death or disability event on any given day this year.

WS Nel, actuarial research lead at True South Actuaries & Consultants, says studies using ASSA models estimated that more than 142 000 income earners will die this year and around 47 000 income earners will become disabled.

He refers to the findings of the Asisa study, which shows that income earners under the age of 30 are most likely to face a substantial life and disability shortfall, followed by earners between the ages of 30 to 39.

“Since eight million of South Africa’s 14.3 million earners are younger than 40 years, the majority of the country’s earners are likely to be significantly under-insured.

“Earners younger than 30 face an average insurance shortfall of R1.6 million for life cover and R1.7 million for disability. Earners between the ages of 30 and 39 years face life insurance shortfalls of R1.4 million per earner and R1.8 million for disability.

“In addition, younger people and their young dependants would need to rely on the income from their insurance for much longer following a death or disability than older earners drawing closer to retirement,” says Nel, noting that the insurance needs for younger age groups are typically higher than in older age groups.

He points out that the insurance gap narrows substantially for earners above the age of 50 years and that older working people are likely to have more life cover than needed and their disability insurance gap is much smaller.

“Older income earners have often settled their mortgage bonds and have paid for their children’s education, reducing the need for life and disability cover. Their concerns then shift to whether sufficient provision has been made for income after retirement,” says Nel.

Closing the gap

He says that it is generally easier and often cheaper for people to close the insurance gap before death or disability forces the family to find ways of making up for the loss of an income.

“The average salary earner would need to spend an additional 4.5% of their monthly pre-tax income to purchase adequate life insurance. However, without adequate life cover in place, the average family would be forced to generate an additional monthly income of R5 630 to maintain their standard of living following the loss of an income earner or alternatively reduce household expenditure by 30%.

“The disability of an income earner would force the average family to generate an additional monthly income of R7 443 to maintain their standard of living or alternatively reduce household expenditure by 33%.

“The additional income required by a household following the permanent disability of a breadwinner is higher than when an income earner dies, because the disabled family member still incurs expenses until retirement,” says Nel.

Ironically, the cost of buying additional disability cover is generally lower than life insurance.

Demographics

It is not surprising that the Asisa study found that life and disability cover differs between different groups of the population.

Income earners in Limpopo – one of SA’s poorest provinces, have the lowest life and disability cover adequacy, of only 26% and 32% respectively. The highest cover is in place in the Western Cape, with 56% of adequacy for life cover and 54% for disability cover.

Women seem to be more responsible, and the life and disability insurance gap is slightly lower for women in SA overall.

Income earners with higher levels of education also have the highest insurance cover. The Asisa Insurance Gap Study shows that employees with university degrees have provided for at least 76% of their life cover needs and 58% of their disability cover requirements.

The life insurance gap is the biggest for earners who have not completed school. However, many of these earners would have at least 50% of their disability cover needs provided for, largely due to government disability grants.

This article originally appeared on Moneyweb and was republished with permission.
Read the original article here.