The average SA family would have to cut living expenses by half in the event of the breadwinner's death, to close an estimated insurance gap of R10-billion, according to an independent study.

The Insurance Gap Study is aimed at measuring the life and disability insurance shortfall for South African households.

Releasing the results at a media conference in Johannesburg on Thursday, Gerhard Joubert, chief executive officer of the Life Offices' Association (LOA), said the findings of the Gap Study were of grave concern.

"We knew that South Africans are underinsured when it comes to death and disability cover, but until we were presented with the final outcome of this study, we did not realise the extent of the insurance gap in this country."

Joubert said the current reality was that if the main earner of a household died or became disabled, the average family would have little choice but to cut their living expenses by half.

"Unfortunately, this often involves selling the family home, because bond repayments can no longer be met. And children often have to give up on their hopes for a decent tertiary education."

He said for the average earner the cost of closing the life and disability insurance gap would require between R1330 and R2322 a year.

Death insurance gap

The study showed that the death insurance gap was highest for households earning less than R3800 a month. However, the reverse was true for disability insurance, but only because of the government disability income grant which, due to its fixed amount nature, was much more effective at replacing lost income in the lower income brackets.

Joubert said for this reason the LOA had focused strongly over the past two years on putting in place the Financial Sector Charter Council approved Zimele product standards.

"The approval last week of the LOA's new set of Zimele product standards for credit life insurance, life cover and physical impairment cover by the FSC Council, will ensure that low income earners will soon have access to a comprehensive range of affordable and appropriate long-term insurance products."

In order to maintain their standards of living after the death of a breadwinner, South African families across the board would require total life insurance cover of around R7.9-billion. But the Gap Study shows that South African households had life cover amounting to only R3.5-billion last year, leaving a shortfall of more than R4 billion.

Similar levels of underinsurance were true for disability cover.

Households would require around R12.3-billion to maintain their standards of living should one of the breadwinners become disabled. In reality, however, actual cover only amounts to around R6.5-billion, leaving a disability insurance gap of around R6-billion.

These figures were conservative estimates of how much cover would be required to enable families to maintain their current standards of living after a breadwinner can no longer contribute as a result of death or disability.

Joubert said that in order to close this significant insurance gap, households would need to spend around R34.4-billion (3.9 percent of annual household expenditure) a year.

"The only group of people who have sufficient life cover are high income earners older than 55. Generally this group has saved sufficient money and has also benefited from group life and disability cover through years of membership of an employer's pension fund. On the disability side, however, this group also remains underinsured."

Sapa