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Underinsurance in Australia

More people are underinsured in Australia than you might think. Here’s how to avoid it.

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Just because you have insurance doesn't always mean you're completely covered. Underinsurance is a big problem in Australia; it can leave you with hundreds or maybe even thousands of dollars of expenses left uncovered, even if you have insurance.

What is underinsurance?

Underinsurance is when you fail to take out enough insurance to completely cover the costs if something goes wrong. Essentially, when your insurance policy pays out, if it's not enough to pay for everything that it was intended to cover, then you're underinsured.

For instance, if you were to take out a life insurance policy for $200,000, but needed approximately $600,000 to pay off your home loan, school fees and credit card debts and to allow your loved ones to continue the same standard of living, you would be underinsured. When you pass away, your loved ones would still need to come up with $400,000 to cover the rest of your fees, debts and loan repayments.

Underinsurance also means that you've been paying monthly or annual premiums, probably for a number of years, only to not receive all the cover that you actually need.

How can I make sure I'm not underinsured?

Underinsurance can be scary, but if you take out the proper amount of cover, it's not something you need to worry about. Here's what you should consider getting:

  • Life insurance: Life insurance pays a lump-sum benefit to a nominated beneficiary, usually family members, when you die. With the right amount of cover, it can pay off all of your loans, expenses and debts. Benefits typically range from $25,000 to $2.5 million.
  • Income protection insurance: If you're injured or ill and need to take some time off work to recover, income protection insurance can pay you up to 75% of your salary. Any less than this and you could struggle to pay the bills while you're off work, especially if you're off for a long time.
  • TPD insurance: Total and permanent disability (TPD) insurance protects you if you become permanently disabled and have to permanently quit work. It usually comes as a lump sum payment and can take care of medical expenses and other debts and bills that you may have to pay off.
  • Trauma insurance: If you're suffering from a serious or critical illness, or are recovering from a major injury, trauma insurance pays you a one-off lump-sum payment. It can be bought as a standalone policy or as part of a wider life insurance package.

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Default level of life insurance cover

$250,000

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Average cost of raising a child

$300,000

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Average home loan size

$400,000

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Average credit card debt

$3,231

Get the correct life insurance cover to avoid being underinsured

Name Product Maximum Cover Maximum Entry Age Minimum Cover Terminal Illness Benefit
Real Family Life Cover
$1,000,000
64
$100,000
$1,000,000
Get a refund of 10% of the premiums you've paid (in the first 12 months) with The Real Reward™ .
NobleOak Life Insurance
$15,000,000
69
$50,000
$3,000,000
First month free for NobleOak Life Insurance. T&Cs apply.
ahm Life Insurance
$1,500,000
65
$100,000
$1,500,000
ahm Health members can save 10% off premiums.
Guardian Life Insurance
$1,500,000
64
$100,000
$1,500,000
Zurich Ezicover Life Insurance
$1,500,000
69
$50,000
$1,500,000
Get your first month free. T&Cs apply.
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What is the impact of underinsurance in Australia?

According to the most recent statistics from Rice Warner's Underinsurance Australia report, only a third of the working population in Australia have income protection insurance. A summary of Rice Warner's report by Vanguard Investments also revealed that if the average Australian was to use their life insurance, then only:

  • 47% of their family's basic needs would be met
  • 28% of the amount needed for their family to maintain their current standard of living would be met

Here's a look at what an average Australian family can expect if they are underinsured:

  • A 50% reduction in the family's monthly income. Studies have shown that should an earning member of a family not be able to work anymore for any number of reasons, the monthly income of that family will be cut by at least 50%. And if that member happens to be the main breadwinner of that household, then the monthly income would reduce even further. Without the benefits from an insurance policy to make up for this loss in income, that family is likely to face financial hardships that will be extremely difficult to overcome.
  • Having to sell off investment assets. A major accident or a serious illness can lead to very high medical bills. Hence, if you are not independently wealthy and you do not have adequate insurance cover, then you are looking at huge medical expenses with practically no way to meet them. In such situations, you may have to sell off whatever investments you have so that you can raise money for your health care and also provide for your family until you can start making an income again.

Why are people underinsured?

There are various myths surrounding insurance, which could be the reason for Australia's severe underinsurance problem. Here's a look at some of these myths, as well as a look at what the truth really is:

1. Myth: Insurance is only for people who are not in good health

A lot of Australians believe that if they have great health, they don't need insurance. Only people who have health issues or a history of genetic illnesses in their family require insurance.

However, Insurance not only protects you in case of injury or serious illness, but it also covers you if you die unexpectedly. Some other reasons to get insurance if you're young or healthy or both, include:

  • You have debt.
  • You are married or in a de facto relationship.
  • You have children or people dependent on your income.
  • You have a lifestyle that would be difficult to maintain if you no longer worked.

There are countless other reasons besides your age and health to get life insurance. Ultimately it's about protecting what you already have well into the future.

2. Myth: Insurance policies are too expensive

Most people believe that insurance is way too expensive and that they would never be able to afford it. However, there are a number of ways to find affordable cover that can suit your individual needs. Some ways you can lower the cost of insurance include:

3. Myth: Insurance companies never pay out claims
You've probably heard from friends, family or on the news, the difficulties in getting claims paid out by insurers. While we hear a lot about the bad, it can cloud the fact that in general, insurance providers do more often than not, pay out eligible claims.

You can even check the claims performance for most insurance brands. This information is mandatory reporting for insurance brands and it can help you make a decision about the trust you put in your insurance.

4. Myth: Government assistance will be enough to get by

It is true that the Australian government can provide certain benefits to people who lose their jobs or become unable to work. However, you should think logically about whether that assistance is enough for you or your family to get by.

In many instances, Centrelink payments might not be enough for you or your family to keep up your lifestyle should something happen. If you have a high amount of debt or your living expenses are more than what could be funded by minimum wage, Centrelink likely won't be enough for you or your loved ones to get by.

How to prevent underinsurance

Know your finances

If you're already on top of your finances, it's probably easier for you to figure out how much money you would need if something were to happen, be that a serious injury or your death. Taking note of all of your debts, loans and assets and working out your household's monthly expenses are huge steps towards ensuring you're not underinsured.

Don't be lured in by cheap premiums

Price should definitely be a big factor when you take out a policy, but it's not the only factor. Make sure that your premiums aren't cheap because the payout will be a lot less than you need. Look at the product disclosure statement (PDS) of a policy before you purchase it to find out what's covered and what's not.

Use a life insurance calculator for an estimate

Our free life insurance calculator can give you an estimate of how much you may need, taking into account your earnings, expenses, assets and debts. However, it's not a substitute for speaking to a broker, who can provide you with professional advice.

Speak to an adviser

Retail life insurance cover is usually recommended through a financial adviser. If you want to prevent underinsurance, an adviser is probably your best option. It will likely cost you more than doing it alone, but they will help you work out exactly what kind of cover you need.

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