The big insurance mistake many South Africans make

While most South Africans know to protect assets like their phones, cars, and appliances through insurance, many forget to protect their greatest asset – their ability to earn an income.

Efficient Group economist Dr Francois Stofberg said income insurance in the form of disability, severe illness, and life cover is central to South Africans’ financial survival.

This type of cover has become increasingly important in light of rising costs, as South Africa’s economy is unable to support financially unprepared households.

“Recent growth has been modest, inflation has been relatively contained but vulnerable to fuel and global price shocks, and unemployment remains one of our country’s deepest structural wounds,” Stofberg said. 

“In other words, the macro picture is not collapsing, but it is also not giving ordinary families enough margin for error.”

He explained that, under these conditions, the most pertinent question for South African investors is no longer only about which investment will give the best return. 

“The question is now: ‘Is my financial life strong enough to withstand uncertainty and still move forward?’” he said.

“Financial well-being for everyone means helping individuals and households build a life that is better planned, better protected, and better positioned for long-term growth.”

South African insurance giant Liberty recently warned that South Africa faces a R50.4 trillion insurance gap.

This refers to the shortfall between the insurance cover South Africans need to maintain their standard of living in the event of death, disability, or critical illness, and what they currently have.

South Africa’s insurance gap has compounded at an annual rate of 12.5% since 2021, largely stemming from a lack of education about the importance of long-term insurance.

“The research shows that most South Africans insure only 20% to 50% of their future income, yet the ability to earn is our greatest asset,” Liberty’s head of insurance, Schalk Malan, said.

Four layers of protection

Stofberg recommended that investors consider four “layers” of financial protection when faced with heightened uncertainty.

The first layer is financial foundations, which comes down to basics like understanding cash flow, reducing destructive debt, creating an emergency buffer, reviewing beneficiaries, and ensuring that monthly decisions align with long-term priorities.

“In a weak economy, the households that suffer most are often not only those with too little income, but also those with too little structure around the income that they do have,” Stofberg said.

The second layer is income protection. Echoing Malan’s statement, Stofberg said that, for most people, their greatest asset is not their retirement fund, their home, or their investment portfolio. 

Rather, it is their ability to earn an income over the next 10, 20, or 30 years. 

“Yet, many people protect their phones, cars, and appliances more carefully than they protect the income that pays for everything,” he said. 

“Disability cover, severe illness cover, life cover, skills development, and career resilience are not side issues. They are central to financial survival.”

Stofberg’s third layer is wealth creation, explaining that uncertainty often pushes people into emotional decisions, like hoarding cash or chasing quick returns.

“Neither approach builds sustainable wealth. Long-term investing still matters. Diversification still matters. Retirement planning still matters. Tax efficiency still matters,” he said. 

“The point is not to ignore uncertainty, but to invest through it with discipline.”

This feeds into the fourth layer, which is wealth protection. This includes short-term insurance, estate planning, wills, liquidity planning, and ownership structures.

Stofberg said it also includes making sure that your family is not left unprepared when something goes wrong. 

“Wealth is not truly created if it can disappear through one uninsured event, one legal gap, or one badly-planned estate,” he warned.

“In South Africa, financial well-being is not a luxury. It is how we turn uncertainty from a permanent threat into something we are prepared to face.”