The results are in and the people have spoken. When it comes to life insurance, 61% of South Africans would opt for a income pay-out over a lump sum1. Our lapse rates support these findings. According to our 2017 Lapse Report, lump sum only benefits are 66% more likely to lapse in their first year, compared to income only benefits.
Recommending a lump sum to produce an income is like your clients wanting a red car but suggesting a green one on the premise that they can always have it painted red afterwards. While this would be an absurd idea to any car buyer, South Africans are paradoxically buying lump sum cover in the hopes that it will be sufficient to produce an income should they ever need it, without knowing how long they will need it to last or the interest rates and inflation implications on their investment.
For your clients, it may come as a welcome surprise that income benefits are typically far more affordable than lump sum benefits. These benefits also make servicing the policy simpler in the long-term as all you would need to do is update salary or monthly income amounts to ensure your clients have the correct cover.
At FMI, we believe that protecting your clients’ ability to earn an income should be the foundation of any financial plan. Not only is it imperative that they protect themselves from the immediate effects of not earning an income, but any break in income today could have an enormous impact on their future plans.
How to discuss income benefits with your clients:
1. Protect 100% of your income.Given that 72.5% of South African household income goes to servicing debt2, it’s no surprise that 62% of FMI’s #RealityCheck survey respondents said they’d run out of money within 3 months without an income. That’s why it’s important to protect 100% of your clients’ income against the likely risk of an injury, illness or death. Income benefits are ideally suited to meet ongoing monthly expenses like groceries, electricity, education and investment contributions, whilst lump sum benefits are better suited for any once off costs.
2. Make sure your cover is future-proofed.Unless your clients’ policies give them the flexibility to adapt their cover as their life changes, it’s simply not fit for purpose. FMI’s Future Income Protector allows your clients to increase or change their cover without medical underwriting, by up to 300% of the cover amount that was in place when the policy commenced. What this means is that your clients can protect their income against injury or illness now and only take out Life cover when they need, to take care of any dependants in the event of their death. They can also adapt their cover amount as their income increases or their needs change.
3. Ensure claims certainty. The most important consideration when purchasing insurance is making sure that when it comes time to claim, your clients will be paid. This is why claims certainty forms the foundation of FMI’s products, with a focus on developing products and processes that pay claims quickly, and using definitions that give your clients the best chance of qualifying for a claim.
4. Choose the shortest waiting period possible.Choosing the right waiting period is arguably one of the most important decisions any individual will make when taking out Income Protection. Making the wrong call can leave your clients disappointed and unable to meet their monthly obligations. Even temporary claims can have long-lasting financial consequences.
Take FMI policyholder, Daniela Leigh, as an example - an estate agent with a 7-day waiting period on her Income Protection policy. Daniela lives bravely with the auto-immune disease, Lupus, which results in periods where she’s too ill to work. She’s had 5 claims with FMI, a total of 170 days in claim. Had she selected a 30-day waiting period, she would’ve qualified for 2 claims, with only 33 days in claim – a scenario which could’ve had a massive impact on her financially. All this, due to one simple decision around her waiting period.
Alarmingly, more than 60% of FMI’s clients have chosen waiting periods of 30 days or longer3. And yet, over half the claims in 2018 lasted less than a month. As an adviser, you have an opportunity to make a real difference by setting the record straight and helping your clients understand the importance of choosing the shortest waiting period possible.
5. 75 is the new 65!A retirement age of 65 is no longer the reality for most South Africans. People can’t afford to retire, and many don’t want to because working gives them a sense of meaning. A recent study by Nick Buettner found that “a person is 30% more likely to die in the year he or she retires than during their last year of work, not because they take up risky activities, but because they have lost their sense of purpose”.
That’s why it’s important to start planning and looking at your clients’ risk products accordingly –making sure they choose income benefits with a cease age that allows them to work past 65. Our TIP75 benefit does exactly that, offering occupational based Income Protection up to age 75. This should be the default. You just don’t know when your clients are going to want to or need to retire.
12018 #RealityCheck Consumer Survey
2South African Savings Institute Dec 2017 Quarterly Bulletin
3FMI Claims Stats 2018