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.