Millennials in South Africa face an insurance shortfall of R15 trillion largely due to lifestyle and attitude factors, new research by Discovery Life shows.
The research is based on a 2016 Insurance Gap study by the Association for Savings and Investment in South Africa (Asisa), which pegged the insurance gap for young adults at R9 trillion, of which R4.89 trillion related to disability cover and the remaining R4.1 trillion to life cover. The insurance gap is the difference between cover needed and actual cover held.
In accounting for an increase in life expectancy, a high rate of income growth among millennials due to successive and quick promotions or job changes, and delayed family formation (marriage and parenthood) among other factors, the insurance group found that the 2016 study underestimated the insurance gap among 18 to 34-year olds. Per Discovery’s calculations, the insurance gap widened to R15 trillion, with disability shortfall of R9.4 trillion and a death shortfall of R5.5 trillion.
Citing the low level of savings and high incidence of debt among millennials, Discovery Life’s head of research and development Gareth Friedlander says the ultimate need for cover is to protect future income. He points out that around a third of millennials have some form of long-term savings while 46% have no savings at all. At the same time, 64% of millennials have personal loans giving rise to a debt-to-income ratio of 73%.
Interestingly, the research proves that factors such as delayed family formation, which some millennials use as a reason to discount the need for insurance, hold little to no weight. “In line with the trend to get married later in life, millennials need to protect a far greater portion of their income on disability,” says Friedlander. “They need a higher replacement ratio as the proportion of their household income that will be missed after disability is effectively 100%.” According to Discovery Life, changing just the replacement ratio to 100% sees the disability insurance gap jump 72% to R8.4 trillion, which is equivalent to an average of R2.4 million per earner.
So why aren’t millennials investing in disability and life cover?
Millennials, by engaging in risky behaviour such as using cellphones while driving, exhibit an “invincibility complex” and, in an age of instant gratification, show a “present bias and allergy to long-term planning,” says Friedlander.
Discovery Life’s study also found that millennials distrust financial advice, with only 16% prepared to work with a financial advisor. In addition, 55% of young adults claim not to have life insurance because of affordability constraints. The study shows that individuals stand to receive over 1 400 times more cover per rand spent on life insurance versus other types of insurance. Friedlander says life insurance is perceived as expensive only because the full benefit of the cover is not considered.
The study affirmed Asisa’s “relatively simple” solution to closing the gap, which requires that millennials increase the amount of their current disability gap by 1.9 times, or an additional 4.6% of their income.
“The alternative,” says Friedlander, “would require millennials to reduce household expenditure by 42% or increase their income by 97% post-claim.”