be safe, not sorry

Have you thought of how you would cope financially if the breadwinner or the main income earner in your family died or became disabled?

Many households do not have enough insurance for their life and their ability to earn an income, yet possessions like cars, boats, stereos and so forth are fully insured. Why is this the case?

Is it because they think that death, accident or illness will not strike while they are in the prime of their life?

A recent study commissioned by the Life Offices' Association (LOA) shows that South African families are underinsured by an estimated R10trillion.

The research, referred to as the insurance-gap study, was conducted by True South Actuaries and Consultants to measure the extent to which we are covered in the event of death or disability.

The study calculated the gap separately for death and disability and this was defined as the difference between the "ideal cover" and the "actual cover".

Gerhard Joubert, LOA's chief executive, says the findings of the study were a "grave concern".

He says that if the main earner of a household dies or becomes disabled, the average family would have to cut their living expenses by half.

Joubert says: "Unfortunately, this often involves selling the family home because bond repayments can no longer be met. And children often have to give up their hopes for a decent tertiary education."

Joubert says that for the average earner the cost of closing the life and disability insurance gap would require between R1330 and R2322 a year.

The study shows that the death insurance gap is highest for households earning less than R3800 a month.

The reverse is true for disability insurance because of the government disability income grant which, due to its fixed-amount nature, is much more effective at replacing lost income in the lower income brackets.

In order to maintain their living standards after the death of a breadwinner, all families would require life insurance cover of around R7,9 trillion.

Currently, households had life cover amounting to only R3,5 trillion last year, leaving a shortfall of more than R4trillion.

And similar levels of underinsurance are true for disability cover.

Households would require around R12,3 trillion to maintain their living standards if one of the breadwinners became disabled.

In reality, actual cover only amounts to around R6,5trillion, leaving a disability insurance gap of around R6trillion.

Joubert says in order to close the gap, households would need to spend around R34,4billion (3,9 percent of annual household expenditure) a year.

He says: "The only group of people who have sufficient life cover are high income earners older than 55. This is due to saving sufficient money and also benefiting from group life and disability cover through years of membership of an employer's pension fund."

But this group also remained underinsured on the disability side, he says.

The study shows that an average earner (someone earning around R60000 a year) should provide life cover of between R431000 (in a belt-tightening scenario where all extras would have to be dropped) and R531000 (to preserve current standards of living), should the earner die.

Joubert says: "These are the lump sum amounts that would be required to generate a monthly income to sustain the household. But in reality, the average earner is only covered for around R239000."

Joubert believes that the average required life cover for earners in households relying on a monthly income of R8200 and higher is R2,1 million.

In order to have sufficient life insurance cover to maintain current standard of living, the study shows that the average breadwinner should be spending about 3,9 percent more (in addition to current life-insurance spend) of monthly living expenses on life insurance premiums.

Joubert says the situation is even more dire when it comes to disability insurance.

The average amount by which South African households should be insured against disability is between R645000 (in a belt-tightening scenario) and R833000 (to preserve current standards of living).

The study shows, however, that actual disability cover amounts to only around R430000.

Joubert says that the approval recently of the LOA's new set of Zimele product standards for credit-life insurance, life cover and physical impairment cover by the Financial Sector Charter Council, will ensure that low income earners will soon have access to a comprehensive range of affordable and appropriate long-term insurance products.