South Africans are spending more than they earn, with 72.5% of household income going to servicing debt1. So, it’s not surprising that the most recent Statistics South Africa Survey2 figures show a negative savings rate at -0.10%. This debt trap is a slippery slope. With such overwhelming debt obligations, compounded by exorbitant interest rates, anyone on this treadmill is in a highly precarious financial position and the likelihood of ever reaching debt-free status – let alone an active saving habit - is altogether unlikely.
As a result, life insurance is so often seen as a grudge purchase and many South Africans are either under-insured or totally uninsured altogether. According to the 2016 Association for Savings and Investment South Africa (ASISA) Life and Disability Gap Study, 14 million families faced a combined insurance shortfall of almost R29 trillion should the main breadwinner become unable to generate an income. For those who do have life insurance in place, their premiums are usually the first to go when times get tough, financially. But it’s those individuals who need insurance the most - if they are struggling to make ends meet when they are earning an income, how would they manage with any interruption in that income?
SA’s Risk Reality
FMI’s (a Division of Bidvest Life Ltd) 2018 #RealityCheck Consumer Survey found that the inability to earn an income for as little as 3 months would have devastating effects for most South Africans, with 62% of respondents saying they’d completely run out of money in that time, and nearly 20% going as far as to say their house and assets would be repossessed.
Another startling reality is that income benefits only constitute 6% of all cover sold in South Africa3. When one considers that a temporary injury or illness is the most likely risk throughout any individual’s working career4, South Africans are dangerously exposed if they don’t have income cover in place. This is particularly relevant for SA’s young professionals, who, according to the same FMI consumer survey, are twice as likely to have an injury or illness during their working career - and 5 times less likely to die before age 65 than they think5. The risk realities for these young earners paint a different picture: the average 25-year old only has a 15% chance of dying, versus an incredible 92% chance of a temporary illness or injury that will keep them off work for more than 2 weeks during their working lifetime6.
SA’s Risk Planning Solution
To demonstrate this cost saving between the traditional lump sum approach versus an Income First approach, let’s use a 32 year old male (non-smoker), married with 1 child, and earning R30 000 net monthly income as an example.
Shortfalls of the industry norm: A traditional lump sum combination of R9,4 million Disability Lump Sum, R950 000 Critical Illness Lump Sum and R9 million Life Lump Sum would cost R3 224.05 per month in premiums, with cover that would only insure him against a permanent disability, critical illness and death.
Taking a more progressive approach: Using a combination of income and lump sum benefits, which ensures he is covered for all risk reality, would include - R30 000 Temporary and Extended Income Protection, R39 000 Critical Illness Income, R30 000 Life Income for 2 years, R5 000 Life Income to child’s 24th birthday, R20 000 Life Income to 70th birthday, plus R500 000 Disability Lump Sum, R500 000 Critical Illness Lump Sum, and R1 million Life Lump Sum cover. All this would only cost him R2 254.13 a month in premiums, with cover that would protect him against all of life’s risk events.
A savings tally of billions: Based on total premiums in force in South Africa for Life and Disability, clients could save billions of Rands7 with a simple switch to income benefits. Now that’s worth a moment to contemplate. As an adviser, this single shift in how you give advice, can fundamentally change the lives of income earners across the country. They can choose to either save or invest that money, or for those under-insured, they can get more cover for the same amount of money.
1The South African Savings Institute Dec 2017 SARB Quarterly Bulletin
2Statistics SA 2019 Q1
3Swiss-Re New Business Volume Survey 2018
4FMI Risk Stats 2019 – Temporary Disability unable to work for 14 days or more up to the age of 65
6FMI Risk Stats 2019 - Temporary Disability unable to work for 14 days or more up to the age of 65
7True South 2016, Insurance Gap Study