There is a general consumer perception that life insurance is complex and expensive and that when you need it most, you have to fight to have your claim paid. As a result, many South Africans are dangerously under-insured. A recent industry study revealed that the average South African only has a third of the cover they need. Not only do people not have enough cover, the cover they do have in place doesn’t necessarily suit their individual needs.
At FMI, we believe that life insurance benefits should protect your income against the risk of temporary or long-term Disability, Critical Illness or Death and the best way to do this is through a combination of income and lump sum benefits. Lump sum pay-outs are a great way to settle debts and income benefits are perfect to cover ongoing monthly expenses. They are easier to understand and plan for because they mimic the income stream you are trying to replace and are often more affordable than the equivalent lump sum benefit.
However, the vast majority of disability cover sold are lump sum benefits (recent industry statistics suggest approximately 80%). There are a number of risks policyholders are exposed to when only having lump sum disability cover:
• They typically only protect against permanent disabilities
FMI’s claims stats show that 7 out of 10 people will experience at least 1 injury or illness during their working career that will prevent them from working – however, only 3% of those are permanent.
• They do not protect against multiple claims
Once a person has claimed for a temporary disability, they are 3 times more likely to claim again, either due to a related illness/injury or deteriorated health.
• The risk of managing a large sum of money
While lump sums are great to settle debts or once-off expenses, they should not be used to provide an income. It’s very difficult to accurately determine the amount of lump sum cover an individual requires, given projected inflation, interest rates, investment returns and earnings. In addition to the planning and investment risks, there is the possibility of the money running out before a policyholder or beneficiary dies, or being tempted to spend the lump sum pay-out on luxuries like expensive holidays or cars, leaving nothing to pay the bills.
So why are lump sum benefits still outselling income benefits? The primary reason may be simply because it’s how it’s always been done. Historically, insurance providers have offered mainly lump sum benefits against the 3 D’s – Disability, Dread Disease and Death. While this practice is slowly shifting, for many it remains the default. As a result, many people are not even aware income protection exists. For those who are aware of income protection, the perception is that it’s only available for certain professions. While in the past this may have been true, today, income protection benefits are available to individuals in almost every occupation.
The same principles for disability lump sum also apply to critical illness and life cover. That’s why we have applied the same philosophy to our entire product range. Whilst most insurers offer income benefits for disability, FMI remain one of the few who allow you to take a combination of income and lump sum for critical illness, disability and life cover.