First published in Business Report 4 November 2019.
In the current economic climate, we hear the same solemn message time and time again. South Africans are cash strapped, which is no surprise considering that the average monthly salary is decreasing by 1.9%1. We have a negative savings rate at -0.10%2, which together with 72.5% of monthly household earnings servicing debt3 , indicates that by and large South Africans are spending more than they earn.
Even more humbling is the medical aid inflation rate, currently more than double that of the Consumer Price Index (CPI)4, forecast to outstrip annual salary escalations. This means that salaries won’t be able to keep up with medical aid premiums, giving policyholders even less comfort and less money in their wallets.
At this time of year, when medical aid policies come up for annual review, customers have to take a hard look at their monthly costs and make some tough financial decisions. Medical aid premium hikes put even more pressure on already decreasing disposable incomes.
There is, thankfully, some good news. An unlikely suspect, your life insurance plan holds the key to unlocking long term financial stability, more bang for your buck and an opportunity to use these macro shifts to your advantage. All it requires is a simple rebalance.
Typically, South Africans’ risk portfolios are largely made up of Life, Disability and Critical Illness cover using lump sum benefits. Lump sum benefits are, however, usually expensive and limited to only insuring permanent disabilities, serious illnesses or death. Income benefits on the other hand, protect an individual’s ability to earn an income, meaning that their monthly salary is secured in the event of both temporary and long-term injuries, illnesses or death. Giving customers a much greater chance of having their claim paid. Who knew you could claim for an incident as minor as a broken ankle?!
There is still a place for lump sum benefits – they are a great way to settle debts or once-off expenses in the event of permanent disability or death. But choosing lump sum benefits as a replacement for your future income is risky because it’s impossible to accurately predict investment returns and inflation rates ten, twenty years from now. This, along with the premium affordability factor, results in many South Africans being under-insured.
A simple shift to choosing income benefits can have a profoundly positive result – both in qualifying for more common claim events like a temporary injury, and they’re often significantly more cost effective than the lump sum equivalent. What’s more, South Africans can use these premium savings to provide for medical aid premium hikes and ease any budget strains.
To demonstrate this cost saving, meet Siyanda. He’s 32 years old, a non-smoker, married with 1 child, and earning R30 000 net monthly income5. Now let’s compare the difference between the traditional lump sum approach and the more progressive combination of income and lump sum benefits.
Lump sum only benefits – the traditional approach:
For R3 606 month, Siyanda would only be insured against permanent disability, critical illness and death. This is calculated off of R9,4 million Disability Lump Sum cover, R950 000 Critical Illness Lump Sum cover and R9 million Life Lump Sum cover.
A combination of lump sum and income benefits – the progressive view:
Siyanda could rather choose to protect 100% of his income with Temporary and Long-term Income Protection, a Critical Illness Income benefit that would pay 130% of his monthly insured income for 12 months6 as well as R500 000 Disability and Critical Illness Lump Sum cover to pay for any additional, once-off costs.
To complement this, Siyanda could also get R1 million Life Lump Sum cover and he could opt for the unique Life Income benefit to provide his wife with a monthly income of R30 000 for 2 years - plus R20 000 a month until his 70th birthday. To top it all off, a Life Income benefit could pay R5 000 a month until his child’s 24th birthday to make sure his education is taken care of.
All this, for only R2 254 a month!
That’s a 37% saving - R1 352 extra in Siyanda’s bank every month! And of course, he will be protected against all of life’s risk events, not just permanent disability, critical illness and death.
"A simple shift in your risk portfolio can release funds needed to meet the cost increases you may face going into 2020."
It's a simple proposition. It’s a change that promises to relieve financial headaches by reducing insurance premiums and using that saving to cover rising medical aid premiums. Even more importantly, it’s a solution that prevents you from being unable to pay your monthly bills in the first place, like medical aid, should you be unable to work due to injury or illness. Because without Income Protection, how would you finance your medical aid premiums?
You don’t have to compromise. There is a simple way to take action and stay ahead of these socio-economic shifts. Speak to your financial adviser and ensure your insurance needs are taken care of in the most proficient manner possible.
1End 2018 - https://www.thesouthafrican.com/news/average-salary-in-south-africa-2019/
2Statistics SA 2019 Q1
3The South African Savings Institute Dec 2017 SARB Quarterly Bulletin
4Source: Discovery Health Medical Scheme annual results presentation. Medical inflation July 2018 to end-June 2019.
6Less the waiting period and subject to the benefit term