Money Marketing – Feature

Author: Nic Smit, Product and Pricing Executive

Once you have people who depend on you financially, life insurance becomes crucial because it ensures that your dependants are provided for after your death. 

According to ASISA, South African life insurers paid out nearly 900 000 death claims worth R39.9bn in 2023. That is R39.9bn that will provide school fees for children who lost a parent, ensure that widows and widowers are able to provide for themselves after losing a spouse, and help provide care for elderly people who lost a child that may have cared for them. The payouts on life insurance policies provide material value to society. As an industry, we should strive to ensure that this cover is accessible to as many people as possible. In South Africa today, most of the death cover sold to individuals is either in the form of a funeral policy or a more comprehensive underwritten policy. Far more South Africans have death cover through a funeral policy than an underwritten policy in 2021 the FSCA’s Financial Sector Outlook Study reported that 42% of adults reported owning a funeral policy, compared to only 10% who own any other kind of life insurance policy.² While these two types of products provide a payout on death, how the cover works is fundamentally different. Our view is that an underwritten policy provides far better cover than a funeral policy, for several reasons:

Cover on funeral policies is limited. Many people take multiple funeral policies to access the amount of cover that they need (the average South African has four funeral policies according to specialist funeral insurance underwriter, KGA Life). In comparison, underwritten policies allow far more cover than funeral policies and the overwhelming majority of South Africans would be able to secure the amount of cover they need on a single underwritten policy.

Funeral cover is expensive. When you consider what you pay per rand of cover on a funeral policy compared to an underwritten policy, an underwritten policy provides far better value for money. The Swiss Re Individual Volume Survey revealed that for cover sold in 2023, funeral cover was on average eight times more expensive per rand of cover than the underwritten death cover sold.

Funeral cover doesn’t provide immediate cover. Because applicants for funeral cover are not underwritten, there is typically a six-month waiting period for deaths by natural causes. This is a significant gap in cover that leaves the life insured’s dependants facing a significant risk of being left nothing. 

Funeral Policies only provide a payout on death. Death is not the only risk we face – underwritten policies allow you to take out benefits that also pay out if you are temporarily or permanently disabled, or diagnosed with a critical illness. Underwritten policies allow you to protect yourself against the major risks you face outside of death. This is not an option on funeral policies.

“As an industry, we should strive to ensure that this cover is accessible to as many people as possible”

Fortunately, some financial advisers recognise this issue and are actively working to address it. These advisers assist clients with existing funeral policies, helping them replace those policies with an underwritten one. This allows clients to maintain the same amount of cover for less, or get more cover for the same premium, all while being insured from day 1, as well as enjoying access to other life insurance benefits. Additionally, for many of these customers this will be the first time they receive a Financial Needs Analysis to help them understand their needs and select the best product to meet those requirements. This is a great example of the incredible value of financial advice and the transformational impact financial advisers can have on peoples’ lives by giving them access to guidance and to products that were previously inaccessible to them.

However, it’s not just advisers who can help to address this issue. While we believe that underwritten policies offer material advantages over funeral policies, there is one area where funeral policies offer better cover than an underwritten policy they allow customers to easily cover their immediate family members on a single policy. Customers who have existing funeral policies that cover both themselves and their immediate family members lose the cover for their family if they replace their existing funeral policies with an underwritten policy. To remove this trade off, we believe that life insurers can come to the party by adding the option for the life insured to also cover their spouse and children when taking out death cover on their underwritten products. This is exactly what we at Bidvest Life did with our July 2024 product update.

The benefit of this change extends beyond just giving existing funeral policies one less issue when converting their cover. In 2022, over one in five Bidvest Life critical illness claims paid out were for the life insured’s child rather than the life insured themselves.³ We are confident that none of those policies were taken out with the intention of covering the life insured’s children, but ultimately the decision to automatically build in cover for their children helped our customers when they needed it.

At the end of the day, life insurance products are meant to provide financial assistance during difficult times. The traditional approach to life insurance product design is to focus solely on events affecting the life insured. By extending cover to include the life insured’s immediate family, life insurers can broaden the range of events for which they offer support and become more relevant in their customers’ lives.

References/Disclaimer

• https://www.asisa.org.za/media/iqzhaezu/20240722 life-insurers-paid-close-to-900-000-death-claims-worth-r39-9-billion-in-2023.pdf
• https://www.fsca.co.za/Documents/FSCA%20Financial%20Sector%20Outlook%20Study%202022.pdf
• Bidvest Life 2022 Claims Report