Peter Dempsey, deputy CEO of the Association for Savings and Investments South Africa (ASISA), takes a look at the most important reasons why young people need to take insurance seriously.
You’re in your prime in your twenties. You are starting your career, making your first purchases and having fun. Life is an adventure. So why buy insurance?
In your twenties you are statistically more at risk of being involved in an accident that may result in death or disability. Research conducted by Statistics South Africa in 2013 into causes of death in South Africa showed that death rates reach a peak between the age of 20 and 34 years. Just over 42 per cent of all deaths in the 15 to 29 year age group were from non-natural causes, including accidents and road crashes.
In the majority of accidents causing these deaths many more would have been injured and possibly even left disabled. Therefore, the first risk cover you should buy in your twenties is disability cover, because not only are you at the highest risk of becoming disabled, but you also have the most to lose in terms of earnings.
The younger you are when you become disabled, the higher the lump sum benefit that you require to survive financially. The older you are, the greater the likelihood that you have made provision for retirement. On the other hand, a young person who becomes disabled and can no longer earn an income would have to rely on the one lump sum disability benefit payment for a lifelong income.”
For this reason a trusted financial adviser could also recommend a disability benefit that pays a monthly income instead of a cash lump sum.
Instead of thinking that you don’t need insurance because you’re healthy, consider that getting insurance will be cheaper and easier if you’re healthy. People in their twenties are far less likely to have developed illnesses and conditions that may drive up premiums or place limitations on the insurance cover they may qualify for. According to the ASISA 2013 Life and Disability Insurance Gap Study, which measures the difference between existing life and disability cover and the actual insurance need of South African earners, individuals were underinsured by R9.3 trillion for life cover and R14.7 trillion for disability.
We need to develop a habit of hoping for the best and preparing for the worst. The best time to put sunscreen on is before you lie in the sun. It’s too late when you’ve already been burnt – and insurance is no different.
By joining the insurance pool in your twenties, you can enjoy the benefits of a healthier insurance profile and may be developing healthy savings habits for the future.
South Africans are some of the most credit active consumers in the world with a household debt to disposable income ratio of 78.4 per cent. The cost of debt has also increased with the recent 0.25per cent raise in the interest rate, adding to individuals’ debt responsibilities. Since you are starting out in your twenties, you are unlikely to have enough savings to cover debts should you die or become disabled.
If you pass away, the weight of these debts could fall on your loved ones. If you’re left disabled, you’ll have the added burden of medical expenses and loss of income, while still needing to cover these debts. Having adequate financial protection already in place will protect you and your family from financial devastation should you fall victim to a life-changing event such as death or disability.
Life and disability cover become really important when you start a family as this will provide financial support for your partner and your children should something happen to you. Disability places an even bigger financial burden on a family than death, because not only does your income fall away, but living with a disability is also expensive.
In the year to June 2015, life insurers paid benefits of R366.8 billion to consumers, providing thousands of South African’s with vital benefits following events such as death or disability. This money will have helped families pay off debts, cover day-to-day living expenses, fund children’s education and pay for medical costs.
Premiums are priced according to the amount of cover required and are also influenced by factors such as age, gender, occupation and health. Women generally pay lower premiums than men, and non-smokers lower premiums than smokers. Thus people in their twenties to take advantage of their favourable insurance profile.
Insurance premiums are very affordable when you are young and healthy. You are also able to add extra benefits to your policy such as guaranteed insurability later in life when you may want to increase your cover, as well as premium waiver cover whereby your premiums will be paid by the insurer if you are no longer able to earn an income due to disability, dread disease or retrenchment.
Take the example of a 25 year-old male with a degree and an office job that earns him a monthly income of R15 000. He takes out life and disability cover for R1 million. Provided that he is healthy, does not smoke or engage in dangerous activities, his low-risk profile means that he could qualify for premiums as low as R146 per month for life cover and R105 for disability cover.
The same man only ten years older at the age of 35 years would be paying premiums of R192 each month for life cover and R160 for disability cover, provided he has not developed a serious illness. Arguably he would have saved money spent on insurance premiums in the last decade, but if he has developed a serious illness, he would have to pay substantially higher premiums with limitations on his cover in future – if he qualifies for cover at all.
The table below shows how premiums would escalate by age for the man in the example referred to above. Disability cover is excluded for people over the age of 65, as disability benefits for income loss are only paid to people until the age of retirement, or 65 years.
|Age of Entry (Age next birthday)||Death Benefit||Disability for Regular Occupation|
|25||R 146||R 105|
|30||R 156||R 136|
|35||R 192||R 160|
|40||R 256||R 216|
|45||R 355||R 291|
|50||R 534||R 476|
|55||R 813||R 608|
|60||R 1 150||R 813|
|65||R 1 956|
|70||R 2 998|
Source: Sanlam Personal Finance
Since your unique personal circumstances will determine the risk cover that you buy, Dempsey emphasises the importance of consulting a trusted financial advisor before signing up for a product that may not meet your long-term needs.
Ultimately, you need to consider the opportunity your age represents for getting financial protection.
Article Source: RiskAfrica.com