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South Africans overestimate their risk of permanent disability or death

But underestimate their risk of temporary illness or injury – survey.

Many South Africans overestimate their risk of permanent disability, critical illness or death, but underestimate their risk of temporary illness or injury, a survey has found.

This suggests that people may have an incorrect mix of risk cover; they may be paying for life cover even though they don’t need it, or may be under-insured for events that are most likely to affect them.

According to FMI’s #RealityCheck Consumer Survey, 48% of the almost 700 people surveyed considered life insurance as mere death cover.

Brad Toerien, CEO of FMI, says people generally need more disability cover than life cover. If they become disabled, they will still need to provide for themselves as well as their families, but if they die there will be one less mouth to feed.

Yet, the amount of life cover sold is more than twice as much as disability cover.  

The consequence is that people don’t have the cover they need, or have life cover before they need it, Toerien says. A young adult who just started earning an income, and who doesn’t necessarily have debt or dependents yet, often buys life cover even though there is no good reason for it (apart from getting it due to fear that they might be excluded in future).

According to the survey, 61% of respondents would choose an income benefit over a lump sum benefit. However, almost 80% of the disability cover sold in South Africa pays a lump sum, while nearly all critical illness and life cover pay a lump sum. While a lump sum is helpful to settle debt or pay for significant expenses, people often find it difficult to manage large amounts of money that need to last a long time. Investment, longevity and inflation risk also make it difficult to calculate what an adequate lump sum would be.

Toerien says the survey suggests that people do not understand their risks. Twenty-five to 35-year-olds think they are five times more likely to die before age 65 than they actually are.

“They completely overestimate the risk of death and, just as importantly, underestimate the risk of an injury or illness.”

According to FMI’s claim statistics, 70% of people will have some injury or illness in their working career that will stop them from working (at least temporarily). For 25-year-olds, there is an 86% chance of a temporary injury or illness and only a 8% chance of a permanent injury or illness, yet people generally start out with life cover, add critical illness cover later and only then sign up for income protection, Toerien says.

“The problem is that we are dangerously exposed to the most likely risk event.” 

The survey found that the inability to earn an income for three months would be devastating to most South Africans. Two-thirds of respondents indicated that they would run out of money within three months. Almost 20% said their house and assets would be repossessed, while one in seven would no longer be able to pay school fees. Over a third of respondents expected “catastrophic results” if they couldn’t earn an income for longer than three months, like losing their house.

The survey was conducted by Answered in July.

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When I started to work 50 years ago different insurance salesmen put incredible pressure on me to take out life and permanent disability cover, all only lump sum, but none tried to sell me temporary disability cover.

The problem with all disability insurance policies in South Africa are the terms and conditions which are extremely onerous. I doubt there are many people who have ever waded through the legalese and all the IFS and BUTS.
For example, with one particular insurer, the failure to notify them of the smallest change in the duties of your job can have a severe effect on your benefits. This is a real case. At the inception of the policy the job is Manager, Admin 50%, 50% Supervision. At date of claim the job is Director Admin 55%, Supervision 40%, Manual 2.5%,travel 2,5%. Failure to notify the insurer ( in terms of the conditions) of these dramatic changes in risk allowed the underwriter to reduce the lump sum benefit by 41% and the income benefit by 20%. Treating customers fairly? Where did this requirement sit in the policy document? Page 29 of 36 pages of terms and conditions. Did the broker/agent bring this to the attention of the policyholder? No. Did the broker/agent even know about this condition. I doubt it.

I did not know that you could overestimate the risk of death. Here I was thinking that death was a certainty.

3 situations you might die in.

1. No dependants.
2. With dependants.
3. With dependants that aren’t really dependants.

That’s to say no kids, having kids and having kids that work or don’t work but should be working. Life cover is needed for just one situation.

They are referring to the risk of death before the age of 65. People have all kinds of cognitive biases. It’s probably because we more vividly remember the deaths of younger people and regard them as more tragic, so we assume the risk of dying young is higher than it actually is, and over-insure for death.

Always the same old story – you need to avoid sales agents who are tied to product providers. They will flog you a product. Find a good independent financial advisor who knows what is available across the market.

Good advice on it is actually crucial as benefit and contribution patterns should be planned properly for the years ahead. Yo don’t want to buy the cheapest option now only to find premiums spiralling out of control down the line.

Also important that cover is part of an overall estate plan which aligns all investments, assets, wills trusts, business interests etc.

The risk of death must be 100% or am I missing something.

Yes, you are. The relevant risk is the risk of death in the near future. We all know we’ll die someday. In my grandfather’s case it was at the age of 100 years and 7 months. Both Old Mutual and Sanlam paid out his (small, and by that time fully paid up) life polices on his 100th birthday.

Old Mutual and Sanlam made a small fortune out of the deal…

1. Save up a 6 month emergency fund and put it in a savings account.
2. Get term level life insurance if you have dependents. NOT whole life. Cancel when no longer needed. Typically when the kids leave and you have enough money saved to insure yourself.
3. Get disability insurance that pays a monthly amount equivalent to your salary or a high percentage of it.

EZ

Great advice.

Just one thing to add – get the cover as early as possible, because when you want to get Disability cover(outside of the employer provided cover) at 50 it is incredibly expensive!!

Of course the company that specialises in temporary income disability would find a study result that supports the need for their product. Advertorial.

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