In May 2005, a study conducted on behalf of the Investment and Financial Services Association (IFSA) estimated that as many as 60% of all Australians are underinsured. Underinsurance is becoming an increasing concern with many Australians failing to recognise the role that Life Insurance and Income Protection pays in a family’s financial plan.
The harsh reality is that in the event of an accident or illness leading to death or permanent disablement, many Australian families would not receive a large enough payout to cover even a year’s income. Staggeringly, an estimated 80% of people would only have enough cover to last up to 5 years.
When considering Australia as a whole, it is estimated that the level of underinsurance for parents with dependent children is of the order of $1,300 billion. It is not a nice thought, but imagine how difficult it would be for these families to deal with this unexpected financial pressure at an already emotionally challenging time.
The graph to the right demonstrates the percentage of Australians and the number of years income covered by current life insurance cover.
Australian Bureau of Statistics (ABS) figures show that around 4,400 parents with dependent children die each year. With so many families with nowhere near the level of cover required, it is not surprising that the underinsurance problem is of growing concern.
Today it is more important than ever for families to take steps to protect themselves financially. With increasing levels of mortgage, credit card and other debt it is critical for Australian families to protect themselves in the unfortunate event of an accident or illness.
Families with dependent children are likely to be the most significantly impacted when considering the financial consequences of the death or permanent disablement of an individual. According to Rice Warner Actuaries, these are basic requirements for an Australian family:
- Singles with no dependents: Needs ranges from 2 times taxable earnings at younger ages to 6 times taxable earnings at older ages
- Parents with younger children: Needs ranges from 2 times taxable earnings at younger ages to 6 times taxable earnings at older ages
- Parents with older children: Needs estimated to be 6–9 times taxable earnings (full-time)
Reasons for Underinsurance
Some of the reasons for underinsurance in the Australian Life Insurance market include a lack of awareness to the financial impact that can be caused by sudden illness, injury or premature death and an understanding of the products that can protect them – such as Life Insurance, Trauma Insurance and Income Protection. Some people choose to believe “it won’t happen to me” – (which unfortunately we have seen is not the case on too many occasions) or that personal insurance is too expensive.
Life insurance in fact should be an essential component of every family’s financial plan. To discuss the issue of underinsurance further and how you may look to help address this issue, please contact the team at Make A Difference Insurance.