Cost misperceptions of income protection result in lack of vital insurance

Zurich Insurance Group (Zurich), the global insurer and the Smith School of Enterprise and Environment at the University of Oxford have issued the results of a recent study on ‘income protection gaps’ (IPGs), based on a survey of over 11,000 respondents in 11 countries, shedding new light on income protection gaps globally, including the UAE.

Failure to protect one’s income in the event of disability, illness or death poses a significant challenge and can be devastating to personal and family security. A temporary or permanent disability due to accident or illness can suddenly strip someone of their monthly income. The gap is called an income protection gap, which doesn’t only affect individuals but can also profoundly upset business profitability, government welfare funds and the economy as a whole.

Only 28% of respondents in the UAE have insurance to protect their income should they become ill or disabled and nearly one-fifth have coverage in case of premature death. Respondents included UAE nationals, Arab expats, Asian expats and Western expats, reflecting the diversity of the UAE workforce. Just under half (49 per cent) of Western expats and about a third (34 per cent) of Asian expats had income protection, with only 14 per cent of UAE nationals and 13 per cent of Arab expats being covered.

Very few government provisions exist for expats in the UAE and companies will only provide limited cover to help with employee income protection. Therefore, it is important that expatriates in the UAE take individual responsibility and seek out the right level of cover to suit their personal needs. A third of respondents claimed they would be willing to consider buying insurance and pay an average of 6 per cent of their monthly income for it. A perceived high cost of income protection was the consistent reason given for being unwilling to consider buying insurance across all countries. Cost perceptions pose a barrier in the UAE as well as other countries as 31 per cent of people believe protection insurance costs are higher than they actually are.

The Average Claim

The average critical illness cover Zurich International Life, Middle East recommends for a young family is a five to eight times multiple of annualised income and life insurance cover is around twenty times annualised income. With an income of USD100,000 this would mean a life cover of USD 2 million and critical illness cover of USD500,000 costing a premium of USD10 a day. Ultimately, this is 3.5 per cent of the annualised salary and is therefore lower than the percentage of income that individuals are willing to spend on income protection. However, Zurich states it is important to emphasise that every individual situation is different and therefore financial advice is important.

Globally, the study showed that those individuals who have insurance are not necessarily more financially literate but were instead influenced to buy insurance by first or second-hand experience of people they know having suffered a disability, illness or have passed away which resulted in a loss of income. The study shows a 35 per cent higher purchase of Income Protection by those with first or second hand experience of someone who has experienced a loss of income, globally. This confirms behavioural research showing ‘subjective knowledge’ gained through life experience has a much stronger impact on action and decision-making than objective knowledge that is formally learned.

UAE Results

UAE specific results of the study show people are more influenced by those who have suffered a more life threatening case such as stroke, cancer or heart attack, making up 40 per cent of reasons for income loss, than by those 26 per cent who experienced a loss of income due to stress or emotional causes.

Jason Waldron, Zurich’s protection expert comments: “This shows the importance of a healthy lifestyle as one preventative measure that can lead to a decreased chance of illness and disability and a lower likelihood of income loss. Nevertheless, it is essential to start planning early as the cost of delay could be significant as health does generally not improve over time.”

“Protection is a vital part of financial planning because when income stops coming, everything else stops. Experience creates a key demand for insurance, unfortunately for some the demand for insurance only comes after the event and often this is too late. Therefore, it is important people in the UAE take individual responsibility and seek financial advice from a qualified adviser to determine the right level of cover that suits their personal needs.” says Waldron.

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