Mind the life cover gap

shock to the system A shock event, such as the loss of a job, can see a low-income household plunged into debt
shock to the system A shock event, such as the loss of a job, can see a low-income household plunged into debt

Johannesburg - The latest life and disability insurance gap study conducted on behalf of the Association for Savings and Investment SA (Asisa) by True South Actuaries & Consultants shows that South Africans face a combined insurance shortfall of R28.8 trillion.

In simple terms, that is the amount of insurance cover that is needed to meet the gap between the total existing life and disability insurance cover in place currently and what would be required to make sure all working South Africans have sufficient cover to provide an income for their families if they died or became unable to work.

Peter Dempsey, deputy chief executive of Asisa, says the insurance gap widened by R4.8 trillion from R24 trillion at the end of 2012 to a staggering R28.8 trillion at the end of last year.

Dempsey says the unfortunate truth is that a shock event, such as the loss of a job, can see a low-income or low-asset household plunged into debt.

“The challenge then is for that family or household to rise back above the poverty line and, unfortunately, these families often end up in a debt trap,” he says.

This is the space in which microlenders are active, and Dempsey says households end up condemned to a never-ending life cycle of debt.

“The impact of a shock event such as a job loss can be similarly devastating for a high-income household, but these households take strain and are often able to recover in the medium to long term.

The role of insurance is to provide consumers with a safety net by pooling risk to avoid financial ruin,” he says.

“The truth about life insurance is that ultimately someone pays.

"Either you pay for the premiums so that you have cover, or your family pays the financial consequences if you don’t have life cover in place,” Dempsey says.

WHAT CAN YOU DO?

If you are earning an income, there will be a financial impact on your household if you die or become permanently disabled.

The point of life insurance is to ensure that your family is able to continue to manage from a financial point of view and this is particularly important if you have dependents.

You could buy life insurance if you don’t already have life cover in place; and if you do have life cover, you should be meeting with your financial planner once a year to check that the life cover you have in place is sufficient.

You need to consider to what extent you might be able to count on family or extended family for support in a time of crisis.

Ideally, you want to insure against risks that you can’t afford or don’t want to take, so it is important to identify what those risks are and to note that those risks will change over time.

For example, if you are single with no dependents, then you only require disability insurance and no life insurance.

However, later in life when you marry and have children that are dependent on you, your life assurance requirements will become significant.

Dempsey says if you are underinsured, you have three choices: either close the gap by buying life cover; reduce your household expenditure if an earner in your household dies or becomes permanently disabled; or increase the monthly earnings of your household.

AVERAGE LIFE INSURANCE GAP PER INCOME BRACKET
Average net
annual income
Average gap
per person
Total gap for
all earners
Additional monthly income (net of tax) needed after deathOr cut household expenses by
Poorest 20% earnersUp to R26 310R61 055R171 billionR3307%
Next 20% earnersR26 311 to R54 272R323 548R906 billionR1 75128%
Next 20% earnersR54 273 to R102 305R655 388R1.8 trillionR3 54641%
Next 20% earnersR102 306 to R214 244R1.2 millionR3.3 trillionR6 34938%
Richest 20% earnersMore than R214 245R2.4 millionR6.7 trillionR12 87436%
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