Bridging the income protection gap
Tan Jee Yee 
We need to ensure that we are sufficiently insured and not suffer from an income protection gap should the worst happen – Freepik

EVERY household has a primary breadwinner whose income supports and feeds each member of the family.

What if something happens to that person? What if an accident renders him disabled, or causes his death?

What happens to the family after the breadwinner passes away or is permanently disabled?

The Income Protection Gap (IPG) mostly refers to situations such as these which essentially cause a “reduction in household income as a consequence of the death or incapacitation of an adult wage earner on whom the household relies”, as defined by insurance group Zurich.

Let’s face it, not many of us consider how we would handle income interruptions caused by disability, illness or even the passing of a partner.

This is not just in the context of how our family members can continue without a primary breadwinner, but also how it affects our retirement income.

We have savings for this, sure, but how long can our savings last? As it is, we have often heard about how Malaysians are not saving enough for retirement.

That being the case, are they saving sufficiently to care for their families if they ever get incapacitated?

This primarily is an issue involving insurance. With the right plans, our family may be sufficiently covered should the worst happen.

The question now is whether we are adequately covered. Unfortunately, according to surveys, most of us are largely underinsured.

It’s vital to understand the IPG and be aware of our situation so that we can take the necessary steps to bridge it.


Addressing the gap

At the forefront of understanding the IPG across the globe are Zurich Insurance Group and the Smith School of Enterprise and the Environment at Oxford University.

They have collaborated to steer research towards the issue. Over the course of three years, Zurich has released a series of IPG reports that reveal the scope of the gap.

For the studies conducted in 2015 and last year, a total of 19,500 respondents from 12 regions, including Malaysia, were involved.

The general manager of Life Insurance for Zurich Insurance Malaysia Bhd, Mukesh Dhawan, says there are two broad reasons why the global IPG will continue to widen.

The first is the rise of disability rates throughout the world that is caused by an ageing population, with more classifications of mental health issues as disabilities.

In Malaysia, as of March, 419,805 people registered with the Social Welfare Department as persons with a disability. This is 1.31% of the population.

Additionally, by 2030, 15% of Malaysians will be older than 60. Households headed by an elderly person experience a higher incidence of poverty (22.7%), according to Zurich.

The second reason is the declining level of available funding provided to households from both the public and private sector.

Mukesh notes that, in light of the 2008 economic crisis, developed countries have tightened budgets and cut existing benefits provided to those who have suffered disability and premature death.

At the same time, developing nations are prioritising spending on low-income households while failing to keep pace with those from the growing middle-income bracket.


Inadequate social protection

“Rising rates of informal, part-time, or temporary work have also resulted in a growing workforce that is not covered under state protection schemes,” he says.

Mukesh says households that are strongly dependent on one breadwinner are the ones most affected by the Income Protection Gap

While the full scale of the problem is hard to fully ascertain, Mukesh says the International Labour Organisation previously stated that 73% of the global population lives without adequate social protection coverage.

However, it is important to note that while IPG exists in many countries, the severity depends on a variety of factors. Hence, it is difficult to determine which countries are most affected.

So who are most at risk in this growing gap? Mukesh says overall, it is the households that are mainly dependent on one breadwinner.

Young households or low-income families which have not saved a substantial amount are also at risk.

Yet the impact of the gap isn’t just down to the individual level, but also the country as well.

If the gap is not addressed, many households will face rapidly declining retirement savings, and some even poverty.

A growing gap presents a constant burden to governments as it may result in reduced tax revenue as workers who are partially disabled find it increasingly difficult to find work and pay their taxes.

At the very least, Malaysia is faring better in comparison to other countries in the survey.

Results from last year’s IPG survey by Zurich indicates that the country is among those that have a relatively high level of income protection and high awareness of the need to protect themselves and their families.

Some 59% of those surveyed say they have a “good understanding of the options available to protect themselves and their families from income loss”. This is 30% higher than the international average.

Also, 41% were confident of their understanding of life insurance, which Zurich says led to a high number of respondents already possessing insurance against such risks – 63% have disability insurance while 45% possess life insurance.


Private insurance preferred

Interestingly, the survey found that Malaysians prefer private insurance providers to cover income loss instead of the government, with 81% saying they prefer insurers to provide them protection.

At the same time, 73% of respondents who do not have income protection insurance say they would consider buying it. This shows Malaysians are aware of the need for income protection.

While Malaysians may be more aware of the need for protection compared to those from other countries, Mukesh says that the country still has gaps in two areas.

The first is low insurance penetration. Mukesh says market penetration is now at 54 to 56%. The number is even lower among  the Takaful segment, which is 15%.

An even bigger issue, he says, is under-insurance. Essentially, while Malaysians may buy insurance, they may not have purchased plans that adequately protect themselves and their families should the worst happen.

This has been a prevalent issue. The Life Insurance Association of Malaysia said last year that in 2015, while about 50% (around 12.5 million) of Malaysians had life insurance coverage, 90% of them were underinsured.

In this context, underinsured means that their insurance coverage may only be at one or two times their annual income.

Mukesh says the industry average to determine if the person is adequately insured is if the coverage is 10 to 15 times the person’s annual income.

For instance, if the person earns RM65,000 annually, their life insurance will have to cover at least RM650,000 in order to sufficiently provide for the family after death.

The insured amount differs from household to household. Those with families will require more. “For disabilities, the coverage has to possibly double or triple that figure,” Mukesh says.

Considering that a disabled or incapacitated person still requires medical attention and income for himself, the coverage has to be even more than what life insurance can provide.

The IPG isn’t something that we, as individuals, can bridge. In its latest IPG survey, Zurich lays down key solutions that can be undertaken by governments, employers and insurers to address the gap.

This includes having governments encourage greater protection through tax incentives to nudge individuals and employees to consider more income protection measures.

Employers, on the other hand, can include income protection as part of their employee benefits and maximise coverage through auto-enrolment, besides hosting financial education programmes.

Zurich themselves are hoping to address the issue by assisting part-time and temporary workers – those who may not contribute to the Employees Provident Fund – by providing schemes that address the need for flexibility and low cost.

“Pricing of income protection still remains a factor that Malaysians consider.

“We are looking at offering more options and flexibility in how we provide them income protection insurance,” Mukesh says.

Yet, individuals must ensure they are sufficiently protected as well. Just purchasing life insurance isn’t enough. One needs to know that he is sufficiently protected as well.


Financial plan required

One can start by ensuring his coverage is at least 10 to 15 times annual income, but sometimes it’s not as easy as that.

“The thing is, your expenditure, savings, investments, loans, commitments, family members and your career path is something that needs to be taken into account as well.

“Merely multiplying your annual income won’t be sufficient – for the most part, you need a proper financial plan,” says financial planner Joan Weber.

Weber, who works with advisory firm The Balanced Solution, says an individual needs to constantly review his financial requirements every two to three years, to know where he stands.

“This is so that he can know if his income protection can properly cover his family members should something happen,” she says.

For the most part, an insurance agent can help assess one’s financial situation and recommend a plan that suits the budget and ensures sufficient coverage.

Weber says that assessment should occur more often than just once in a lifetime.

“You need to talk to your financial planner or insurance agent to consistently review the sufficiency of your plans,” she says.

In the end, the IPG is something that affects all of us. We need to take proactive steps to ensure we are sufficiently protected in the worst of times.

It starts with awareness, and now is the time to take action.

Ultimately, it’s your responsibility

HOW do breadwinners ensure they are adequately covered? To start with, check out life insurance calculators that are available online.

Some employees are shocked to learn that their employers insurance scheme does not cover workplace injuries and disabilities, says Weber

“They can give you a picture of what you need to start with, before sorting things out with the insurer,” says Joan Weber, a financial planner with advisory firm The Balanced Solution.

One thing to note, she says, is that life insurance plans are not as unaffordable as many perceive them to be.

“Some life policies can cost as little as RM100 a month. You might need to make a few expenditure sacrifices, but overall life insurance is more important than getting a Starbucks fix,” she elaborates.

However, merely relying on insurance just isn’t enough. Weber says that besides setting aside some money for retirement, having an emergency fund for rainy days could help mitigate emergencies you may not expect.

“Income protection isn’t just for death and disability. You need enough to ensure you can survive retrenchment or other emergencies that insurance can’t cover,” she says.

At the same time, Weber says people need to be aware of the benefits provided by the companies they work for as “some organisations may provide income protection benefits, and some don’t”.

She says most employees she met were oblivious to their company provided insurance coverage. “Some assume that their employers cover workplace injuries and disabilities, and are shocked when they learn otherwise.

“It’s important to know what your organisation provides so you know what you need to cover yourself,” Weber says.

This can also help avoid over-insuring, she says. “You might end up paying for coverage your workplace is already providing.”

Despite that, she says it’s still important to get some sort of income protection regardless of whether the company provides it or not.

“It’s all about being safe from all the ‘what-ifs’. Having more protection isn’t a bad thing,” Weber says.

Ultimately, as with most issues concerning finances and insurance coverage, she says it all starts with good awareness and financial knowledge.

“I believe everyone should take time to learn some basics, and be aware of the financial risks they can possibly face.

“More often than not, many financial problems can be averted with proper planning and simply being aware of them at an early stage,” she says.


This article first appeared in Focus Malaysia Issue 261.