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The Dangerous Consequences of Underinsurance in Australia

How to avoid the financial burden of insufficient insurance coverage.
Fact Checked

Updated: 19 May 2024

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.

What is

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.