The Life Insurance Gap And You

South Africans are under insured …massively under insured. This was the outcome of an LOA-commissioned Gap Study undertaken by True South Actuaries and Consultants earlier this year. Right now, the life insurance and disability gap is R10 trillion, and to play catch-up will require additional annual premium payments of R34.4 billion – a substantial amount in any language and in any currency. This propensity for being under insured is in spite of us being better educated, sporting a higher income per capita and having a greater variety of products and insurers to choose from than any of our counterparts in the developing world.

According to Andrew Bradley of Acsis, who co-presented the results during a media conference, the main reasons why South Africans are currently in this risky situation are that we are not sufficiently informed and we are unwilling to trade off our short term wants against our long term needs.

Be that as it may, the question you may want to ask yourself right now is: Am I one of these statistics, or not?

To help you answer this, we first take a look at who needs life insurance, and who does not; and then we will show you how you could roughly determine whether your current life insurance cover is, in fact, sufficient.

The need for life insurance

Not all people have the need for life insurance. You can get by without it if you have:

1· No liabilities (in other words no debts);

2· No dependents or partners;

3· Sufficient assets that can be used to support dependents and partners until at least age 65; and

4· Enough available cash with which to fund the expenses that will be incurred by your death and the wrapping up of your estate.

Admittedly, only a tiny percentage of all South Africans will fall in the Don’t-Need-Insurance category. The rest of us Need and should ensure that provision for adequate life insurance cover is included in our financial plans.

Determining the size of your life insurance need

Your life insurance needs will be influenced by your liabilities, your assets, how long you will have to take care of your dependents and the costs incurred by death. Here is how you can roughly measure* how your existing life insurance cover stacks up against your dependents’ future needs:

  1. Draw two columns on a blank sheet of paper.
  2. In the left hand column, write down the value of:
    1. your assets,
    2. your savings and investments,
    3. your existing life insurance policies.
  3. Add these together.
  4. In the right hand column, write down the cost of:
    1. a funeral;
    2. wrapping up of your estate;
    3. supporting your dependents. To find the amount, multiply the annual income you will need to provide them with by the number of years you will need to support them for;
    4. settling all your liabilities and debts
  5. Add these together
  6. Deduct the right hand column total from the left hand column total.

If the amount in the right hand column is higher than the amount in the left hand column, you have a shortfall. If the amount in the left hand column is greater than the amount in the left hand column, you have a surplus.

Fixing the shortfall

If you find that you have a shortfall, it is imperative that you fix it – sooner rather than later. The longer you wait and the older you become, the more expensive your life insurance rate will be.

Considering that your long term financial plan is under discussion, you would do well opting for a whole life insurance policy as opposed to a term life insurance policy. Shop around for a product that, in addition to competitive rates, offers you a premium guarantee of at least ten years, the ability to change the amount of cover over time, enables you to decide whether you want a savings plan included or not and allows you to add ancillary benefits such as dread disease and disability to your policy.

To conclude

Some people consider life insurance to be a waste of money. But what greater waste of money can there be than having your family lose the things you all worked so hard towards building up if you are no longer there to add your effort and your income. Although life insurance cannot replace your life, it will enable your family to carry on with theirs.

* Sale of assets assumed