What’s Your Life and Disability Insurance Gap?

South Africans are heavily underinsured for death or disability, according to the 2025 Insurance Gap Study undertaken by actuarial firm True South Advisory for the Association for Savings and Investment South Africa (ASISA). Are you as underinsured as the average earner? Using the assumptions and formulae of the actuarial study, you can get a general idea of whether you need to up your cover or not.

The study focused on South Africa’s 16.1 million formally employed income earners. It found that the life and disability insurance gap had widened from R35.4 trillion at the end of December 2021 to R50.4 trillion at the end of December 2024. Putting this into context, Besa Ruele, a member of the ASISA Life and Risk Board Committee, said the insurance gap at the end of December 2024 was seven times bigger than South Africa’s GDP of R7.3 trillion.

The insurance need is defined as the estimated cover required by a household to maintain its standard of living after the death or permanent disability of an income earner until retirement age. It excludes immediate expenses related to the risk event, such as funeral costs, medical costs, or the costs of adapting a home and car for a disabled person.

Saving towards retirement forms part of the household expenses, as the household would rely on these accumulated contributions to provide an income in retirement. Wealth assets other than retirement savings, such as property and discretionary investments, were not factored into the calculations.

The study showed that the average earner (aged 39 years and earning a net annual income of R251 631) would need at least R2.1 million of life cover to ensure that their family could continue living at the same standard should they die suddenly. However, the average earner has cover of R0.8 million (including group risk cover as part of their employment benefits), leaving an insurance gap of R1.3 million, meaning they are only 37% covered

The lack of disability cover was just as dire. The study showed that the average family would need disability cover of R3 million to maintain their standard of living. With actual disability cover of only R1.2 million, the gap per family is about R1.8 million. In other words, the average family has only 40% of the cover it needs.

The study used two factors in determining the amount of cover needed by a household in the event of death or disability of the main breadwinner – the earner’s replacement ratio and capitalisation factor.

Replacement ratio

This represents the proportion of the earner’s personal income that “will be missed” after the death or disability event. It is calculated as dividing the post-event deficit in the household budget by the earner’s income (See example below.)

• In the case of death, the expenses of the household will drop after the event, as expenses directly related to the earner will fall away.

• In the case of permanent disability, however, the replacement ratio is likely to be closer to 100%, because although the earner is no longer contributing to the household income, his or her personal expenses remain (and may even rise, if ongoing medical care is required).

In both scenarios, the replacement ratio will be lower if other members of the household are also earning income and contributing to expenses.

Capitalisation factor

The capitalisation factor is a multiple of the annual insurance need. It is based on the number of years the earner would have contributed to the household expenses up to retirement age. The factor also assumes a 1.9% real (after-inflation) return on the capital sum.

What’s your insurance need?

For a rough figure of how much you need to be insured for to ensure your family maintains its standard of living if anything happens to you, follow these steps:

• Calculate what the annual expenses of your household would be a) if you died suddenly, and b) if you were permanently disabled and couldn’t earn.

• In each case, for death and disability, calculate the amount that your income would cover – in other words, the amount that would be missed.

• In each case, divide this amount by your annual personal net income and multiply by 100 to determine your replacement ratio (RR) as a percentage.

• Calculate the number of years up until retirement age that your household will depend on your income to determine a rough capitalisation factor. (Note that this does not factor in any above-inflation return, as in the ASISA report, resulting in a more conservative estimate.)

• The formula for the amount of insurance you need, in each case, is:
Annual net income x RR (%) x capitalisation factor.

Example

John (aged 40 years) is married to Julia (38 years) and they have two young children. John is the primary breadwinner, earning a net annual income of R600 000. Julia is also an earner, bringing in a net R300 000 per year. Their annual household expenses, including paying off their mortgage bond and saving for retirement, equal their total net income of R900 000. If John dies, the household expenses will drop to R700 000.

• John’s life insurance need: Julia will still be contributing R300 000 to the lower household expenses of R700 000. Thus the amount that “will be missed” will be R400 000.
Replacement ratio: R400 000 ÷ R600 000 = 67%
Capitalisation factor: Retirement age (60) − Actual age (40) = 20
Life insurance need: R600 000 x 67% x 20 = R8 million.

• John’s disability insurance need: The household expenses will not drop, as John’s personal expenses will remain. Julia will still be contributing R300 000 to household expenses of R900 000. Thus the amount that “will be missed” will be R600 000.
Replacement ratio: R600 000 ÷ R600 000 = 100%
Capitalisation factor: Retirement age (60) − Actual age (40) = 20
Disability insurance need: R600 000 x 100% x 20 = R12 million.

With thanks to WS Nel of True South Advisory for checking the facts and figures.