FMI, a division of Bidvest Life Ltd, has uncovered two dangerous inconsistencies in the insurance portfolios of many South Africans: the amount of Disability cover relative to Life cover; and the amount of Lump Sum benefits relative to Income benefits.
“Lump Sum benefits significantly out-sell Income benefits because South Africans focus on insuring their most dire risks, such as death and permanent disability, at the expense of their most likely risks. But there are no assets more valuable than your ability to earn an income, making income protection the biggest gap in most people’s financial plans,” says FMI CEO, Brad Toerien.
An analogy of such behaviour would be instead of selecting an appropriate drink to quench their thirst - customers are choosing to purchase an item completely unrelated to their needs, like soap. The question of course, is why? FMI suspects the answer lies in long-standing industry norms.
According to FMI’s 2017 Disability Cover Study, Life cover is sold more than twice as much as Disability cover; and Disability cover is typically sold on a lump sum basis, rather than on a monthly income basis. This mismatch between the mix of cover and the benefits sold means most South Africans are only covered for permanent risks, leaving them dangerously exposed to the risk of a temporary injury or illness, which is their most likely risk during their working career, no matter what their age. For example, a 25 year old has a 92% chance of experiencing a temporary injury or illness that will stop them from working for more than 2 weeks. By comparison, they have a 15% chance of a permanent disability, a 37% chance of a critical illness and only a 15% chance of death during their working career1.
According to the FMI #RealityCheck Consumer Survey 2018, South Africans misjudge the risks they face. They underestimate their risk of an injury or illness and overestimate their risk of death. According to the study, 25 – 35 year olds are 2 x more likely to have an injury or illness during their working career than they think and 5 x less likely to die before age 65 than they think.
Compounding this problem is the high number of income earners with no insurance at all, which is largely driven by the misperceptions around what life insurance actually is. FMI’s research2 shows that 48% of South Africans think life insurance is death cover only, and therefore do not see the need for it if they do not have dependants.
“These misperceptions are all contributing factors to income protection benefits being so dangerously undersold in South Africa. Not only do South Africans need to consider their risk of a permanent disability, critical illness or death, but they need to also understand the risk of a temporary injury or illness,” says FMI CEO, Brad Toerien.
Typically, most life insurers go straight to insuring against death and permanent disability with Lump Sum benefits. That’s the conventional approach. But the progressive view is to first protect 100% of your clients’ hard-earned, monthly income against what’s most likely to happen, which are the risks of injury, illness, or being diagnosed with a critical illness. Use a lump sum to cover additional once-off expenses against the risk of critical illness, permanent disability and death.
Toerien also explained that for financial advisers, there are many benefits to taking an income first approach. Prioritising income benefits simplifies the advice process and reduces risk. Apart from being easier to understand, you don’t need to make any assumptions to convert an income stream to a lump sum. Income benefits also make servicing the policy simpler in the long-term as all you would need to do is update monthly incomes with the insurer in order to ensure your clients have the correct cover. They’re typically far more affordable than the equivalent Lump Sum benefit and lapse rates are lower. According to FMI’s 2017 Lapse Report, policies with only Lump Sum benefits are 66% more likely to lapse in their first year compared to policies with Income benefits.
“It is time to go back to basics and put income first by protecting 100% of your clients’ income, before anything else,” adds Toerien. With infinite advantages for both the adviser and their client, an income first approach is irreplaceable.
As a trusted financial expert, you have the unique opportunity to positively impact your clients’ future by recommending cover that will protect their ability to earn an income. It’s up to you to help your clients understand their risk reality, and consequently, the cover they need to protect themselves from their most likely risks. Help your clients understand their risks by taking the FMI Reality Check Quiz
If you want to protect your clients against all major risks, the best way to start is with a benefit that will pay an income,” concludes Toerien.
1FMI 2019 Risk Stats
22018 #RealityCheck Consumer Survey