What to do if you have a big life and disability cover gap

Death or disability of a breadwinner will ruin many families as breadwinners are severely underinsured for these events, the latest life and disability cover gap study released by the Association of Savings and Investment South Africa (ASISA) shows.

Every year 214 000 families are affected as around 440 income earners die and another 145 are disabled every day in South Africa, actuarial statistics show.

On average, these families are forced to live on just 39 percent of the income they need, the latest study of South African’s life and disability insurance needs shows.

The study compares the cover needs of South Africa’s 16.1 million formally employed income earners to the cover they actually had in place at the end of December 2024.

The gap in cover amounted to some R51 trillion rand and the average income earner needs another R1.3 million of life cover and R1.8 million in disability cover to ensure their family could maintain their standard of living should their income fall away due to death.

ASISA LIFE AND DISABILITY GAP STUDY
The study highlights the following staggering average shortfalls. Remember the gap between your needs and the cover you have in place may be quite different. The high average shortfalls highlight the need for you to review your personal cover.
Average life cover need	R2.1 million
Average life cover in place	R0.8 million
Average shortfall in cover	R1.3 million
Average shortfall in cover	R1.3 million
Average cut in living standards on loss of breadwinner	34%
Average cost to get enough life cover	5.2% of average earnings
Average disability cover need	R3 million
Average disability cover in place	R1.3 million
Average shortfall in disability cover	R1.8 million
Average cut in living standards if breadwinner is disabled*	37%
Average cost to get enough disability cover	3% of income
* The financial impact is even more dire when an income earner suffers a total disability, since the family size does not decrease. www.smartaboutmoney.co.za

Is it affordable?

If South Africans were all to take out sufficient life cover, it would cost an average of 5.2 percent of average earnings, Besa Ruele, a member of the ASISA Life and Risk Board Committee, said at the launch of the study.  Taking out sufficient disability cover would require an extra three percent of earnings.

In total, the cost of closing the life and disability cover gap would be a “material” 8.2 percent of earnings, Ruele said.

The average person would not be able to afford this, especially given that most South Africans also have too little saved for retirement, she added. Most people therefore hope for the best and will rely on ubuntu if things do go wrong.

But the staggering shortfalls mean a heavy burden on the nation’s ubuntu, Ruele said. Life insurers are working on this vulnerability using artificial intelligence and increased access to data to make more affordable cover and distribute it cheaper through digital means.

South African families can also help to reduce their own high risks, by assessing the situation and considering if there is a way to close the gap over time – consider what small steps you could take now so that in future the gap will narrow, she said.

Ruele said that could mean educating yourself and getting some advice from a financial adviser or doing your own research about online insurance options.

Don’t be put off by the size of the problem

You should not put off tackling your insurance cover concerns – whether you know you are underinsured or do not know how much you have relative to what you need, Rudolph Geldenhuys, a director at Firecrest and the current Financial Planner of the Year, told Smart About Money.

Don’t delay because you think you cannot afford the cover or you think that approaching a financial adviser will just result in you being sold more cover, he adds.

Get clarity on what you need

It is really important to have clarity about your own unique need for life and disability cover and whether you have a gap, Geldenhuys says.  A review of your life and disability cover should include any group life cover you have through your employer or retirement fund. (Read more What is group life cover and What questions should I ask about my group life cover?) 

It should also take into account any other assets and investments you have and whether these assets earn rental income, dividends or could be sold to provide for future needs, he says.

Do not just rely on averages or bank on the amounts your group life cover provides – such as one, two or three times your annual salary – because it may not be relevant, Geldenhuys says.

He points out that there is a big difference between the life insurance needs of a single person with no financial dependents and someone who is supporting a spouse and children. There is also a big difference between the disability need of someone with their whole working life ahead of them and someone who is near retirement.

The value in today’s rands of the future pay cheques of a person earning R20 000 a month with a 40-year working life ahead of them is R9.6 million, he adds.

Your insurance needs should reduce over time as you need cover for fewer pay days and as you save and invest more.

Make a plan to get to the right cover

Once you know the right amount of cover you need, finding a way to afford and keep it will be easier, Geldenhuys says.

If you just take out a policy or policies without knowing what it means to your family, you may be tempted to cancel the cover.

Review your budget

Don’t just assume you can’t afford the right cover. If it is important to you, look at your budget and make some trade-offs on your spending.

Consider what you can cut versus what can't be cut in line with what is important to you, Geldenhuys says.

Phase cover in over time

If you cannot afford the cover you need right now, consider phasing it in as your salary increases each year, Ruele suggested.

Prioritise cover needs

Geldenhuys says you should also prioritise your insurance needs. If you want to use private healthcare, you need medical scheme membership and possibly gap cover. If you are working, you probably need income protection to protect your earnings and if you have dependants you need life insurance. (Read more: What is income protection?)

Critical or severe illness cover, however, is a nice to have, but if affordability is a problem, you can rely on medical scheme cover and income protection instead, he says. (Read more: What is severe illnes cover?)

The gap study showed that only 15 percent of working South Africans have critical illness or severe illness cover despite the fact, according to actuarial estimates, that 24 000 formally employed income earners are expected to be diagnosed with a critical illness such as cancer, a heart attack or stroke in 2025.

This cover pays a lump sum on diagnosis of a severe illness, which you can use to take extra time to recover, for lifestyle adjustments, or treatment not covered by your medical scheme.

Consider the product

Insurance cover premiums depend on the cover you take out. If you need cover only until you have built up enough assets or while you have children as dependants, cover with a term instead of cover for the whole of your life, will be cheaper, Geldenhuys says.

You can also consider trimming cover each year as your assets grow instead of paying for benefit increases annually, he says.

Credit life cover for your home loan may be cheaper than life cover as it reduces with your debt, Geldenhuys says. (Read more: What is credit life cover?)

Taking out disability cover as an accelerated benefit on your life policy instead of as a standalone policy is another way to make your premiums more affordable, he adds.

Consider how much is enough

While hundreds of South Africans die each day, many more survive to retirement so you need to ensure you do not spend too much money on insurance and don’t save enough for retirement, Geldenhuys says. It is worth asking yourself how much of your cover need you can self-insure. Would your family be able to live on a little less, for example.

Review your decisions annually to see if you can trim your insurance to save more for retirement, he adds.