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Mind the gap - the “underinsured” gap

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South Africans are still severely underinsured for disability. This is according to the ASISA 2013 Gap Analysis, which indicated that 67% of the country’s working population does not have enough risk cover to finance their lifestyle if they become disabled. Over and above that, becoming disabled impacts on their ability to save for retirement.

“The challenge is that when people become disabled, they are no longer able to earn a salary, which means they are no longer able to save,” says Jaco Gouws, risk product manager at Old Mutual.

Disability wears a young face

To add to this challenge, Old Mutual’s experience is that people claiming for disability are relatively young – an average of 45 years old. “If you think about it, 45 is right in the middle of your working life,” adds Gouws. “If you are unable to save, what usually happens is that you either dip into your retirement savings, depend on your loved ones or rely on the government’s disability grant, which is currently R1350 per month.”

Gouws says that people in general are covered for only 25% of their risk cover needs and many of us don’t have cover at all. This could mean that your income will drop from R10000 per month to R2500 if you become disabled and unable to earn an income. For some people this could drop to nothing!

A recent claim statistics guide released by Old Mutual showed that R3.1 billion in claims was paid to the group’s retail customers in 2013. This was made up of:
• Death claims - 76%
• Illness and physical impairment claims – 13%
• Disability claims – 11%
• Retrenchment claims – less than 1%

A further complication is that many who cover themselves against permanent disability, forget or don’t think about temporary disabilities. “Take mountain biking, for example,” says Gouws. “A lot of people actively participate in this sport and the risk of suffering a fracture is high. Most of these injuries are temporary and require only a short recovery period, but this could mean weeks or months without an income. A recent study found that 93% of South Africans are underinsured for temporary disabilities and rely mostly on their savings to absorb this event. You are also 40 times more likely to suffer a short-term disability or illness than a long-term one. It is therefore important to protect your earning ability for not only the long term, but also the short.”

Monthly income cover or lump sum cover?

Income disability cover pays you a monthly income if you cannot work because of a temporary or permanent illness or injury. This monthly income is designed to help you replace any lost income.

Lump sum disability cover, on the other hand, pays you a once-off amount, but only if you cannot work because of permanent illness or injury. The lump sum can be used to pay for once-off disability related expenses and you can reinvest the remaining funds to provide you with an income.

Gouws says that in the past the majority of people preferred a lump sum product, but there is a shift towards income disability as it covers both short and long-term disabilities. If you choose a lump sum product, it is important to add temporary cover. This will protect your financial plan against both types of disability.

Speak to a financial adviser to determine what your needs are, find out which cover will match your life stage, and get you closer to your financial goals.

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