Bridging the insurance gap

Last July a survey by life insurer AXA and researcher Dexx&r confirmed what many in the life insurance industry have been telling us for years: that Australians are grossly underinsured.

In the context of life insurance, underinsured means the difference between the economic loss that would be suffered in the event of premature death and the current amount of cover.

To quote from the report, $512,378 is the amount a person would need to make ends meet for eight to 10 years after their spouse died. This figure was arrived at using Australian Bureau of Statistics’ estimations of the typical Australian’s average weekly earnings and Reserve Bank of Australia estimations of total household debt.

Existing term cover for each employed Australian was found to average $148,136.

Put the two figures together, and this means the average Australian will be $364,242 out of pocket if their spouse dies. Or as AXA and Dexx&r put it, they would be 71.09 per cent underinsured.

The situation was much worse for disability income, with the report finding that Australians will be 76.93 per cent underinsured if they become disabled and unable to work.

The results of the survey are breathing new life into calls by the insurance industry that more consumers need to get insured.

Some in the industry want life insurance to be mandatory.

But so far reactions to calls for compulsory life insurancel have been cool. Industry associations like the Investment and Financial Services Association and the Financial Planning Association have not leapt to support the idea.

Financial Services Consumer and Policy Centre director of policy and research Khaldoun Hajaj says the public wouldn’t have a bar of it. He is dismissive of a need for compulsory life insurance and suspects any suggestion of it amounts to scare-mongering by the insurance industry.

“There’s been no request for it from consumers and there’s been no request from the government,” Hajaj says.

He accepts there is a gap between what people might expect out of their life insurance policy and what they might actually get when it is paid out. But Hajaj says super savings are the last place from which people’s money should be diverted.

“There isn’t enough money going into superannuation as it is to ensure people will have enough when they retire. If anything, what’s needed is an increase in the super guarantee to go into funding for retirement.”

The public probably wouldn’t have been behind the super guarantee either, but that didn’t stop it becoming law, says Sue Laing of Laing Advisory Services, a company that provides educational support to life insurers.

Laing is a proponent of mandatory cover believing it wil help alleviate future pressure on the welfare system.

“I would describe the situation as critical,” she says.

“The longer we go on with an underinsurance problem the more we’re going to compound the issue of baby boomers retiring earlier and retirees becoming a larger proportion of the population. All those factors are really going to put a strain on governments, therefore they’re going to put a strain on taxation.”

She says as a concept, mandatory life insurance is not new. Most superannuation funds, industry and corporate funds in particular, already set aside a certain amount for term insurance — $1 to $2 a week is not uncommon.

But whether this is enough is a different matter.

To bridge the underinsurance gap AXA and Dexx&r say people will need to put an extra $549.78 a year or $10.57 a week into insurance to be adequately covered — about 10 times the amount already contributed in most default industry funds.

According to Laing, a mandatory savings vehicle like the super guarantee would ensure that people pay the extra amount required.

But in the meantime, she believes the best solution to the underinsurance problem is for financial planners to start giving proper risk advice.

Some of her counterparts in the life insurance industry agree, but stop short of endorsing anything compulsory.

Central Highlands Financial Services manager Bernie Toohey says, “You would have a public outcry right across the country.”

“I firmly believe that there isn’t nearly enough insurance cover in superannuation funds, but mandating would be difficult, because you’ve got different people in different situations.”

Toohey, a Synchronised Business Services authorised representative and last year’s Zurich Adviser of the Year, provides a good illustration of the inadequacy of existing cover in superannuation funds.

“I would say that if you took a cross section of the population with their 9 per cent superannuation contribution, 80 per cent of them would have one unit in cover when in fact they should have at least eight or 10 units cover.

“You’ll often find someone with a wife and say four kids with a $250,000 mortgage and they pick up their superannuation report and they’ve got $30,000 in cover. What good is that to his wife and kids?”

Toohey feels the solution lies with financial advisers, the majority of whom, he says, don’t work in the risk market. He says most people are oblivious to the fact that they are underinsured and will probably prick up their ears if a financial planner at least notifies them of the problem.

Matrix Planning Solutions senior manager John Morris agrees.

“There’s no doubt that people are walking around with less risk insurance than they need,” he says.

“That’s a function of a lack of financial education in some respects and there’s probably been a reduction in the number of advisers who are focused particularly on that area, which is a cause for some concern.”

Morris suggests the amount of insurance a person needs will vary for each part of their life cycle. Younger people, for example, who have not had the chance to accumulate assets will need more insurance cover whereas putting money into super takes precedence over putting money into insurance for older folk who are nearing retirement.

“This is why I’d reject any compulsory savings vehicle, because assessing the amount of cover really does depend on [a client’s] personal circumstances and that’s why good advice is important.”