The latest Life and Disability Insurance Gap Study conducted in 2019 estimated that South Africans are underinsured by nearly R35 trillion rand. Industry experts measure this gap for South African income earners up until retirement age, after which protecting your income becomes less important. Why is life cover, at least to retirement age, rarely sold to consumers when the insurance gap seems to get wider every year?
Mainstream life insurance often refers to fully underwritten products that require medical testing and are cheaper, especially if you are healthy. This however misses a significant consumer base who wants to avoid the hassle of medical testing, and who prefers simpler products with fewer questions. Sometimes these consumers simply do not have access to advisers qualified to sell fully underwritten insurance products. Instead, many consumers purchase multiple funeral plans, often resulting in too much funeral cover and no disability protection. This misconception that multiple funeral plans can be used as a substitute to address the Life and Disability Insurance shortfall is common, and suggests that consumers are becoming aware of the gap but are not sure how to close it.
Many consumers were exposed to the death or disability of the family breadwinner at a young age. They had to find work to replace the income lost, instead of building a future on something left behind. This cycle of financial vulnerability is one of the key reasons for the slow growth of the middle-income segment in South Africa. Consumers need help to realise that life continues after the funeral. Consolidating their funeral cover into a single Life Cover plan will either mean more comprehensive protection for their loved ones, or a lower premium.
While much is written about the lack of consumer education, we seldom refer to the abuse of this knowledge gap by financial advisers and insurance companies who oversell funeral cover, especially in the low to middle income segments. We know that limited underwritten products are available, and where affordability is a barrier, cheaper term insurance products also exist. Most of these limited underwritten products fall under the Tier 2 FAIS classification, so almost all financial advisers should be able to diversify their product basket. There is no longer a valid excuse for the lack of proper financial advice provided to the most vulnerable consumers. The world is changing, and our behaviour needs to change along with it.
In the midst of the COVID pandemic, advisers need to ensure that they are equipped with solutions that can meet the need of consumers who want to protect their income while they are working. Instead of taking the easy route and only selling familiar funeral cover, advisers need to put client needs first by introducing them to multiple insurance solutions. By educating clients, advisers will contribute significantly to protecting their financial position. Proper financial advice often leads to reduced policy lapses, which we know are significantly higher in the emerging market compared to more wealthy segments.
Simple limited underwritten life and disability insurance products (with no medical testing) that provide cover until retirement age are more relevant for the emerging market. When sold to the right consumer, these products can provide more suitable financial protection. Also, it will create the financial stability required to build a better financial future for the next generation.