The COVID-19 pandemic has had a major impact on the economy globally, which has a direct impact on consumers’ wallets and their ability to pay their bills. According to a recent TransUnion research study1, 79% of South Africans said their household income has been negatively impacted by the COVID-19 pandemic. Approximately one third of those impacted said their work hours were reduced and 10% had lost their job. And 89% of those impacted said they were worried about how they were going to meet their monthly financial obligations like paying for rent, utilities, their cellphone and debt.
Prior to the pandemic and nationwide lockdown, FMI’s* 2018 #RealityCheck consumer survey revealed that the inability to earn an income for as little as 3 months would have a devastating effect for most South Africans. Two-thirds of respondents said they’d completely run out of money, and nearly 20% said their house and assets would be repossessed within 3 months. With 72.5% of household income going to servicing debt2, the current state of affairs is very bleak for most South Africans.
It’s times like these, when customers need to free-up precious funds, that insurance policies are the most vulnerable. Often the first monthly expense to go, the value of long-term insurance is generally only realised when it comes time to claim. Yet there couldn’t be a more important time to keep these lifelines in place. One way to ease the financial burden if you have disability and life lump sum cover in place is to consider switching to income benefits, because income benefits are typically more affordable than the lump sum equivalent and also bring a host of other advantages not offered through lump sum benefits.
Traditional life insurance benefits have been predominantly lump sum based, which misses the fact that what you are really trying to protect is your income stream. This lump sum only approach has a potentially disastrous impact for many reasons. Lump sum benefits typically only protect against permanent disabilities, and yet the overwhelming majority of injuries and illnesses are in fact, temporary3. The COVID-19 pandemic has certainly made us all realise the value of our monthly income and therefore should remind us of the importance of protecting it.
Let’s use the example of having life cover in place and the difference switching to income benefits could have on your pocket:
Meet Thulani and Wayne. At 40, they’re both non-smokers, earning R60 000 per month. Their wives are 35 years old and they each have two children, aged 8 and 5. They’re also both looking after their elderly mothers who are currently 70 years old.
Both of them have a home loan of R2 million which would need to be paid in the event of their deaths and their spouses would need R20 000 a month to pay for household expenses, their kids would need R10 000 a month to provide for their living costs and education, and they would like to provide R8 000 a month to look after their mothers needs.
Wayne’s financial adviser calculates that he’d need just over R12 million to provide for these needs and he takes out this amount as a life lump sum benefit.
Thulani’s adviser recommends Life Income benefits that will provide his spouse with R20 000 a month until the day he retires. His kids are covered for R10 000 a month until they turn 24 and his mother will receive R8 000 a month for the rest of her life. In addition to that, he also puts in place a life lump sum benefit that will pay R2 million in the case of his death to pay off the bond.
Thulani’s premiums cost him R17864 a month, whereas Wayne’s lump sum only premiums are a lot more expensive at R20814 a month.
What’s more, income benefits offer better cover because they ensure that beneficiaries are properly protected financially after the death of the life insured. And there is no need to predict required lump sum amounts based on assumptions around future interest, inflation and annuity rates, and how long the beneficiary will live for. This often results in a lump sum payout being too low, whereas income benefits match beneficiaries’ needs exactly for as long as they need it. Income benefits also remove behaviour risk - beneficiaries are often tempted to spend on luxuries when faced with a large lump sum of money.
Whilst it feels like we will live in this COVID-19 bubble forever, it’s important to remember the financial shortfall is temporary - whereas cancelling insurance policies will have a long-term, potentially dire consequence to financial wellbeing.
Hennie de Villiers, deputy chair of the ASISA Life and Risk Board Committee, says that policyholders who are experiencing financial difficulties and who might not be able to afford their premiums should contact their financial adviser or insurer with urgency, to discuss potential solutions. This will prevent any rash decision-making, the effects of which may be felt long after the pandemic itself.
*FMI is a Division of Bidvest Life Ltd
1Research conducted by TransUnion in partnership with third-party research provider Qualtrics Research-Services.
2The South African Savings Institute Dec 2017 SARB Quarterly Bulletin
3Temporary Disability, unable to work for 14 days or more during working career. FMI Risk Stats 2019
4 Quote based on a 5% Compulsory Increase premium pattern with Annual Benefit Increase of 5%