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The Dangerous Consequences of Underinsurance in Australia

Russell Cain
Russell Cain Updated: 20 May 2020

How to avoid the financial burden of insufficient insurance coverage.

There are few things worse than needing to claim on your life insurance and discovering your policy doesn’t provide sufficient cover.

In a 2017 Real Insurance Family Protection Report, 37.8% of Australian respondents did not have life insurance coverage, while a further 22.5% had cover but were unsure if it was enough for their needs.

This is very concerning, made worse by Rice Warner’s recently released Underinsurance in Australia 2017 report, highlighting that the underinsurance gap in Australia remain significant.

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Being underinsured has the potential to negatively affect families who aren’t adequately covered if one parent or spouse were to die. Review and make sure you understand your insurance documentation then act while there is still time.

What does underinsurance mean?

Being underinsured means that you either don’t have enough life cover or lack the right type of cover. For example, you may have a death benefit, but no financial safety net should you be unable to work for a specific period due to illness or injury.

Sufficient life insurance is generally accepted to be at least 10 times your earnings. But alarmingly, six in ten people with dependents don’t have enough life insurance cover to look after their loved ones for more than one year if they were to die.

Fortunately, if you are concerned about possibly being underinsured, you can request the advice of a specialist or start comparing a variety of quotes online from some of Australia’s top 10 life insurance companies.

An underinsurance example

An example of underinsurance is that of a two child family where both parents work to pay the mortgage, general household expenses and other financial obligations, like school fees. If one of the parents were to die suddenly and the lump sum payout is not enough to keep paying for these expenses, then they are underinsured.

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What is overinsurance?

Overinsurance can usually be defined as having paid more for the risk dying, becoming critically ill or being unable to work due to disability than what you needed to. For example, if you are single and have a $1 million mortgage and a $2 million life insurance policy and you make it to retirement having paid off your mortgage. You most likely paid double what you needed to, assuming your need was limited to just the mortgage.

If you are thinking of starting a family or already have young children, you will need more cover for when you die or become disabled.  Although your superannuation generally provides funds upon your death, it usually only covers about 30% of what your family will need.

Rice Warner recently released a research study indicating the median level of Australian life cover meets only 61% of basic needs. Not only that, median life cover is only 37% of the income replacement level needed to replace the expected net income of the insured to maintain current living standards until the age of 65.

Why are we underinsured?

Australia has been found to be one of the most underinsured nations in the developed world. The top 5 reasons why people don’t have life insurance include:

  1. The perception that life insurance is too expensive when in fact it costs you far more not to be insured than it does paying a monthly premium. You can find cheaper life insurance when you shop around and compare policies.
  2. A lack of trust that the life insurance companies will pay a claim. Although most Australians see life insurance as important, only a small percentage believe their life insurer will be there for them in times of crises.
  3. Not knowledgeable about life insurance and find it to be too complex. Many people feel lost in where to start and believe it will take them too much time to figure it out.
  4. Being young and healthy. Usually, the younger population thinks their dedication to diet and exercise makes them indestructible.
  5. Not seeing life insurance as a priority. Some people know they need insurance, but they haven’t “gotten to it” yet, or they don’t have kids, so think it’s an unnecessary expense. They have not contemplated the consequences of their mortality and the impact it might have on their loved ones.

If your savings is not enough to protect you and your family in times of crises, then you need life insurance. The best thing to do would be to speak to your broker about how to cover the gap in your cover.

Am I at risk of being underinsured?

You might be at risk of inadequate insurance coverage if any of the following has happened since you last reviewed or updated your cover:

To make sure you don’t pay more than you need to and being underinsured in other areas due to financial constraints, you might want to start looking at how much life insurance you currently have vs what you actually need. 

What happens when you are underinsured?

Being underinsured means your family could be financially vulnerable if something unexpected happened to you. The real cost of being underinsured is for you and your family potentially experiencing significant financial hardship, putting your lifestyle at risk. For example, a serious medical condition might have to be ignored due to lack of funds, and you as the policyholder might be forced to return to work out of necessity.

How to avoid underinsurance

One of the easiest ways to prevent underinsurance is by requesting the assistance of a life insurance broker. A broker will help you find the necessary information quickly and explain it more understandably. You will also, generally, be advised on how much insurance you need to avoid being underinsured.

It’s also important to regularly review of your life insurance to ensure you have adequate cover, especially when you’ve recently progressed to a different stage of your life. Involve your family in helping you avoid shortfalls by requesting their input before making a final decision.

Policy premiums are generally cheaper when you are younger, so choose to get life insurance early in life. If you are still single, you might want to consider purchasing income protection, TPD and/or critical illness cover before buying life cover.

Do your homework and calculate the amount of cover you need and the premium you can afford.

How much life insurance do I need?

Consider buying enough to cover the cost of:

  • Lost income that covers day-to-day living expenses.
  • Your funeral, including the ceremony and burial or cremation.
  • Paying off any outstanding bills or debt payments.
  • Care of your children until they reach adulthood, including their education.
  • Retirement security or to create an inheritance.
  • Maintaining your family’s current lifestyle.
  • Mortgage payments.

While increased pressure from rising fuel, food and electricity prices makes cutting insurance costs tempting, you need to review your policy with your broker, to prevent being exposed to financial losses as a result of being underinsured.

At the end of the day, we all just want to make sure our loved ones are taken care of after we’re gone. Insuring yourself and protecting your loved ones from financial hardship is one of the best decision you’ll make.

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