Financial products leave self-employed in the cold

Financial products leave self-employed in the coldOne of the things to emerge from the COVID-19 crisis is that the financial industry needs to innovate in order to keep up with a rapidly changing workforce that is increasingly comprised of self-employed people.

Most financial products remain rooted in the idea that people work fulltime for a single employer and earn a monthly salary. Yet the economy is rapidly changing, not only with much higher levels of retrenchment and job uncertainty but with a rise in self-employed and so-called “gig” workers.

According to World Bank statistics, self-employed people (small business owners, freelancers, working for yourself) make up 15% of the South African working population. This figure is likely to be under-reported especially in the informal sector.

This segment of workers has been left with extraordinarily little in terms of a safety net. As they are not employees, they could not claim the UIF COVID relief payments. They could not benefit from employee focused loans like those provided by the South Africa Future Trust nor could they claim on credit insurance.

We need to see further innovation around products like insurance, credit insurance and even loan repayments.

People who had contributed for years to life insurance policies discovered that if they could not keep up payments, they lost cover at the most critical time. While many life companies agreed to assist on a case-by-case basis, it is not built into the product innovation.

No access to credit insurance

Credit insurance has been a key cover in protecting people’s credit, yet self-employed people or business owners did not qualify. The retrenchment or loss of income cover is only available to employees who can demonstrate that their employer has cut their salary or retrenched them. There is certainly space to innovate and provide the self employed with some credit insurance cover, perhaps based on a history of income or a major event that would affect their income.

In terms of accessibility to loans, African Bank CEO Basani Maluleke acknowledges that more work needs to be done on understanding the risk and payment profile of self-employed people to make loans more accessible.

But we also need innovation around flexible payment options that are not only based on a monthly payment profile. For example, African Bank customers can opt to pay weekly, which allows them to fit into their payment schedule, but what about freelancers that may work on projects and receive payments in several lump sums during the year?

As a case in point, we were contacted by a woman who paid her loan off in lump sums four times a year. She calculated that she owed R500 a month and paid R1 500, believing the payment was covered for the next three months. It was only on claiming her credit insurance that she discovered that she had been flagged as missing payments. This is because loans don’t allow for forward payment of installments. When you pay a lump sum, it goes to settling the capital, so while it reduces the amount she owed, and therefore her monthly installment, she still owed a monthly installment the following month.

Insurance options

In terms of insurance, there are new players, specifically digital ones, who are innovating around cover and provide a roadmap for developing solutions, especially for those with irregular income.

Investment value and cover if premiums are missed: Indie is an online life insurer which builds up a wealth bonus and provides flexibility around contributions. Indie matches up to 100% of your monthly insurance premium in an investment account, with growth. Every five years you can draw down 10% from this investment. Whatever has not been drawn down is unlocked at the age of 70, which can be used to boost your retirement benefit or just go on a great holiday. You will still receive this wealth bonus even if you have claimed on critical illness or income protection. In terms of payment, you can miss up to five consecutive months of premiums and still have some cover in place, based on how many premiums you have paid. Your cover is equal to the number of premiums paid in the last six months divided by six. For example, if in the last six months you only paid two months of premiums and you make a claim, you get paid out a third (2/6) of your cover.

Single premium cover for life: Ongeza Life Plan provides cover for life with one premium. For example, a female aged 35 could pay R20 674 and have R150 000 life cover for the rest of her life. She can top it up each year with more cover if she chooses. This addresses the issue of lapses. Many people pay for life cover during their working years but let it lapse, effectively losing the benefit of all those years of premiums. This product is not underwritten so you need to compare the premiums and it is expensive if you die relatively young. With normal monthly premiums you are covered for the full value from day one, even though it may take you many years to pay the same value as the single premium. In this example underwritten life cover of R150 000 would cost around R89 per month. However, Ongeza provides a model for how lump sums and insurance-for-life can be used.

Building up emergency fund: Solvency is a short-term insurer which uses a portion of your premium to build up an emergency fund. This can be used to cover any excess owed in the case of an accident, however, if you do not claim you can access up to 50% of the investment after 12 months. In theory one could have used this to meet future premiums if you are under financial pressure. This is part of a growing product base that builds up emergency savings as part of the product design. Reward programme Momentum Multiply allows you to convert shopping discounts into real cash in a money market account for emergencies.

Freezing cover until you need it: There is a move for life insurers to allow the freezing of cover. For example FMI, the life insurance arm of Bidvest, allows you to keep your temporary and extended income protector and disability lump sum cover in place for up to a year if you aren’t working, with certain conditions. Your cover will be fully reinstated once you return to work. This is important in terms of underwriting if your risk factors changed during that period.

Both consumers and providers need to take lessons learned today to help us better prepare for the next crisis.

This article first appeared in City Press.

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