Running for insurance cover

Many Australians take a 'she’ll be right' attitude to the risks they may face during their lifetime, but in doing so they run the risk of paying a very high price should the unforeseeable occur, writes Tim Browne.

Australia is facing a significant crisis. Latest research from Rice Warner shows that the population is underinsured to the tune of $3.1 trillion, and this is costing the Government more than $1.3 billion annually.

This is a serious issue with very real consequences, and the extent of the problem has been reaffirmed by a CommInsure study which found that only half of the Australian population currently hold life or total and permanent disability (TDP) insurance.

Underinsurance is most prevalent in younger age groups and lower income households, leaving these groups most vulnerable to financial difficulty in the event of accident or illness.

In fact, just 36 per cent of 18-24 year olds and 36 per cent of those earning less than $40,000 a year have life cover.

CommInsure’s Life Insurance Study identified a number of key trends, which provide insight into the nation’s underinsurance problem.

Australians are ignoring the risks

Australians are waiting for key milestones to occur before taking out appropriate cover. This approach is far from ideal.

By waiting until they buy a house, get married or have a child to take out cover, individuals run the risk of losing their assets if the unthinkable was to occur.

This could mean no deposit, no house and a greater struggle to meet day-to-day financial requirements. 

A brush with death is not even enough to prompt Australians to take out insurance.

Forty-six per cent say they would go on an overseas holiday after a near death experience, while only 34 per cent would purchase life or TPD insurance.

These figures suggest that Australians aren’t fully aware of the risks – or they believe the situation won’t happen to them.

Unfortunately, statistics show that one in six male workers between the ages of 35-65 will suffer a disability which will leave them unable to work for six months or more, demonstrating that it can, and does happen, even to the young and healthy.

Australians are unaware of what cover they have

A significant education gap is one of the key reasons for the underinsurance crisis. Many Australians don’t understand what level of cover they currently have.

In fact, 58 per cent of people with a superannuation account told us they aren’t aware that they may have some life cover through their fund.

Adding to the problem, only 42 per cent of Australians have ever sought financial advice to ensure their level of cover is suitable for their circumstances. 

Further, if the family’s main breadwinner were to pass away or suffer permanent disablement, a substantial number of Australian families would be forced to sell their house and move in with extended family.

A significant portion of families would also become reliant on Centrelink payments, which are less than $350 per week, compared with an average weekly income for working Australians of $1,322. 

Even those with insurance may not have appropriate cover

We are facing a situation where half of the population does not have insurance, and even those who do may not have sufficient cover.

Our research reveals that 47 per cent of Australians hold insurance through their superannuation only, and just one in five has increased this cover above the default level.

These figures are of particular importance given the substantial difference between payout figures for policies held in and outside of superannuation, with insurance paid outside of super nearly double that paid by an employer default fund.

So whilst insurance through superannuation is a good safety net, it’s important that Australians understand it may not be enough for families to support themselves should an unforeseen event occur. 

Australians believe insurance is too expensive

Another reason why many Australians aren’t prioritising insurance is that they view it as a discretionary purchase and consider it to be unaffordable.

However, it’s not as expensive as many believe. In fact, life and TPD insurance is one of the most cost-effective risk transfer strategies that can be implemented.

For less than $30 a month, a 35-year old non-smoking male, for example, can buy $500,000 of life cover.

One coffee a day for a month would cost close to $100, making life insurance relatively inexpensive compared to other daily costs.

Addressing the crisis

Many Australians are taking a ‘she’ll be right’ attitude to the challenges they may face during their lifetime and are consequently running the risk of paying a very high price for their complacency.

There are numerous statistics which reveal the extent of Australia’s underinsurance crisis – statistics which make it very clear that we as an industry must do more to educate the nation on the importance and value of appropriate insurance cover for each individual’s specific circumstances.

Having the right insurance in place provides peace of mind and financial security if the unthinkable should occur, and financial advisers can review their portfolios and speak with referral partners to identify potential underinsurance among their client base.

One of the biggest challenges for the industry will be finding a straightforward and engaging way to educate consumers around insurance.

Tim Browne is CommInsure's general manager of retail advice.