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Australia’s underinsurance gap is vast

Young family

Current coverage levels don't meet the needs of those insured.

New research has drawn attention to the persistent gap between the scope of people's current life insurance policies and the level of coverage that's actually needed.

Rice Warner’s recently-released Underinsurance in Australia 2015 report reveals the median level of life cover meets just 61% of basic needs; the minimum required to pay off all non-mortgage debt and sustain living standards until retirement age (65 years) or until the kids turn 21.

In addition, the median life cover of Australians only accounts for 37% of income replacement levels; the amount required to replace expected net income and maintain living standards until retirement.

Median levels of total and permanent disability (TPD) cover (13%) and income-protection cover (16%) are also low.

For parents with young children, the underinsurance gap is a far cry from the median level of cover.

For example, a 30-year-old couple with young kids needs the equivalent of nine to 12 years of income from the higher-earning partner in order to provide basic protection for the entire family (see table below).

But for the same family to attain an income-replacement level of life insurance, the higher-earning partner must provide the equivalent of 17 to 21 years of income.

Average insurance needs per partner for families with children

Age of parentsPartnerBasic life coverIncome replacement life coverTPG cover
30Higher earning partner9 to 12 years17 to 21 years14 to 21 years
Lower earning partner2 to 7 years1 to 10 years3 to 11 years
50Higher earning partner4 to 7 years9 to 12 years7 to 12 years
Lower earning partner1 to 4 years1 to 6 years2 to 6 years

Over the last 10 years there has been a slight reduction in the gap, particularly among low-income earners.

While superannuation provides a significant proportion of the total sum insured, median default super cover meets only around half of the basic death cover needs for households with no children and a much lower proportion for families with kids.

Are you planning to pay for your life insurance through your super or just want to know how it works? Discover the advantages and disadvantages of purchasing life insurance through your super.

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