Mind The Gap

Brad Toerien, CEO, FMI

According to the most recent ASISA gap study, South Africans are dangerously under-insured with only 47% of the life cover they’ll need, and only 45% of the disability cover they’ll need. However, when you look a little closer, a further problem emerges – the vast majority of disability cover sold are lump sum benefits (77%) versus monthly income benefits (23%).*

Policies with only lump sum benefits expose policyholders to significant risks:

  • Lump sum benefits typically only protect against permanent disabilities
    FMI’s 2016 claim stats indicate that 7 out of 10 people will experience at least 1 injury or illness during their working career and only 3% of those are permanent.
  • Lump sum benefits do not protect against multiple claims
    Once a person has claimed for a temporary disability, they are 3 times more likely to claim again, either due to a related illness/injury or deteriorated health.
  • The risk of managing a large lump sum of money
    Whilst a lump sum pay-out is a great way to settle debts or once-off expenses, they should not be used to provide an ongoing income. It’s very difficult to accurately determine the amount of lump sum cover an individual requires, given projected inflation, interest rates, investment returns and earnings, not to mention at what age they might need it. In addition to the planning and investment risks, there are a number of other risks associated with a large sum of money – the possibility of the money running out before a policyholder or beneficiary dies; or being tempted to spend the lump sum pay-out on luxuries like expensive holidays or cars, leaving nothing to pay the bills.

According to a recent #RealityCheck consumer survey conducted by FMI, a division of Bidvest Life, 61% of people would choose a regular monthly income pay-out over a once-off lump sum. People inherently understand the value of an income benefit because it mimics the income stream they would need to replace in the case of not being able to work due to an illness or injury.

This growing awareness to put income first reinforces the opportunity for new market growth and the shifting trend from Lump Sum to Income cover.

Here are 4 more reasons to put INCOME FIRST:

 1. Affordability vs spending habits

South Africans believe they can’t afford life insurance, but most of us can… it’s just a question of priorities. FMI’s survey found that 57% of South Africans spend more than R500 a month on fast food, and yet a 30-year old can protect 100% of their income for as little as R24 a day.

2. Affordability vs cost of protecting other assets

People insure their home and their cars but often don’t consider insuring themselves, even though their future income is worth so much more. South Africans underestimate how much they’ll earn over their lifetime. More than half of the survey respondents thought they would earn no more than R10 million. Millennials, in particular, underestimated their future earnings by an incredible 79%. A 25-year old earning R15 000 a month will earn R28 million over his/her working lifetime.

3. Likelihood of using an Income benefit

People don’t understand their risks. We underestimate the likelihood of an injury or illness and overestimate the risk of death. The survey found that people between the ages of 25 to 35-years old are twice more likely to have an injury or illness during their working career and 5 times less likely to die before age 65 than they think. The average 25-year old only has a 10% chance of dying vs an 86% chance of a temporary illness or injury. Therefore, Income cover protects people against their most prevalent risks.

4. FMI HouseView cost efficiencies

FMI’s philosophy is simple – protect 100% of your client’s monthly income and use lump sum benefits for once-off expenses. This approach is far more cost effective than the lump sum equivalent. FMI tested this scenario using a 35-year old male earning R30 000 per month (with salary inflation of 6.5%) and found that if he invested the savings from changing to a combination of income and lump sum benefits (instead of lump sum only) over 30 years, it would add a further 3.5 times his annual retirement spend to his retirement savings. Simply by changing the way he looked at risk planning.

*FMI Disability Cover Study (2018)

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