What Does it Mean to be Underinsured for Families in Australia?
Key Facts
- Many Australians rely on the default level of cover provided in their Super.
- Statistics show that life cover through super only provides for roughly 20% of what is required.
Recent surveys have shown that Australia is one of the few developed nations in the world that is highly underinsured.
In fact, Australian underinsurance is being seen as a grave matter even by the Australian government as it could cost the government billions of dollars in the forthcoming years.
If Australians do not have adequate insurance in place in terms of life insurance, disability insurance, health insurance, and even income protection insurance, then the financial burden that arises from a serious illness or an unfortunate accident can cause severe hardships that the average Australian family may not be able to survive.
It is estimated that at least 20% of the Australian population between the ages of 21 and 64 will suffer some unfortunate event in their lives that will leave them incapable of working. This could be an unforeseen accident, injury at the workplace, or contracting a terminal illness of which there is no history in the immediate family.
This article will take a look at causes of Australia's underinsurance problem. If you would like to receive a review of your current insurance to make sure you have enough cover, you can make an enquiry in the form below.
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When any one of these situations occur, the main breadwinner in the family may not be able to work for an extended period of time, or perhaps forever. An accident or injury could also result in death of one of the earning members of the family, usually a parent to underage children. This could leave the dependents without a regular income and they would find it extremely difficult to cope with the financial responsibilities.
However, with adequate insurance in place, all these issues can be avoided and people can continue to live in a manner that they are accustomed to, even if they end up losing the main earning member in the family. Unfortunately, almost 95% of the Australian population is severely underinsured, which means they are setting themselves up for untold financial problems should they become injured or fall sick and be rendered incapable of working.
Statistics have Shown that Underinsurance is Problematic in Australia
Statistics have finally proven what insurance companies have been telling us for years, Australians in general are chronically underinsured. Especially when it come to income protection and life insurance. Personal insurances such as these fall way behind the uptake ratios of health, car or home insurance.
A recent study published showed exactly where we stand as a nation in regard to protecting ourselves against what could happen in the future. It also gives us an idea of where our values are prioritised. It could be a quite damaging finding if we didn't take into account that many of us mistakenly believe our superannuation gives us all the protection we want.
Most superannuation funds can deliver us a financially healthy retirement but it appears many of us have been neglectful when it comes to ensuring the life insurance part of our superannuation gives our families sufficient protection if we should die before retirement. The results of the study are as follows:
- Car insurance was found to be the most important insurance to have in that 79% reported taking out motor car insurance.
- Home contents and building insurance was next with 77% of respondents reporting they had cover in this area.
- Private health insurance was held by 69% of those questioned.
- Life insurance came in with 54 percent having cover, just over half of those undergoing the study.
- Income protection, although growing, still only has a 45% uptake.
It appears that it's the younger generation who are running the risk of being under-insured as the uptake of life insurance was found to be higher among the 40 to 54 age group, especially the non-singles. This most likely represents the family age group carrying high mortgages especially those with pre-tax household income of $125,000 or higher.
Income protection is most likely to be held by both males and females under 55 years of age and once again by those with pre-tax household incomes of $125,000 or more.
These figures, when applied to the whole Australian population, show that a staggering 95 percent of our population have inadequate life insurance cover. The Lifewise/NATSEM Underinsurance report estimated that such a level of underinsurance had the potential of costing the federal government $1.3 billion over the next ten years.
To bring the underinsurance figures into perspective they should be matched up against other figures that show 18 families in Australia lose a working parent every day of the week. Each year there are 236,000 people of working age who suffer a serious injury or illness and of these 17,000 are forced out of the workforce for a prolonged period of time, some permanently. Research undertaken in 2010 by the National Centre for Social and Economic Modelling (NATSEM) at the University of Canberra found that one in five Australian families will suffer from an insurable event during the parent's working lives.
Why is Australian underinsurance such a big problem?
The Australian Securities and Investment Commission (ASIC) have released figures from a recent study confirming underinsurance is a serious problem in life insurance in Australia. The study, that was undertaken on behalf of the Investment and Financial Services Association (IFSA), found up to 60 percent of families with dependants didn't have sufficient life insurance to financially care for the family for any more than 12 months should the main breadwinning parent die.
This finding supported an earlier report from insurance researchers DEXX&R that was commissioned by AXA that discovered just 22 percent of Australian have any life insurance at all and those who did have cover only averaged $210,976 where an amount of $670,621 was actually required.
There have been many reasons given as to why this is the case in Australia, which, by international standards is a rather affluent society. Some claim it's an inherent attitude of 'she'll be right mate' but this has probably been overdone by looking back to attitudes more akin to the depression of the 1930s. Today's Australian is more money conscious than that of the past but they still believe rather strongly that the government will be there for them if the worst should happen. Not like their cousins in the United States who have been brought up on more of a diet of independence. When superannuation was made mandatory in Australia it reaffirmed this attitude of communal help but they have been let down to a large degree by many superannuation funds not carrying sufficient term life insurance to cover the average need of fund members. This shortfall has to be brought home to the Australian consumer otherwise considerable financial hardship will continue to occur.
So why aren’t Australians purchasing adequate amounts of insurance cover? Well, here is a look at some of the possible reasons why Australians are underinsured:
- Everything’s fine attitude: Australians are known for their relaxed outlook towards life and their “she’ll be right” attitude. This kind of attitude may help them to overcome many difficulties in life, but it could also be the reason why Australians do not take insurance seriously. They probably believe that everything will always be alright in their lives and that they will not face any situations that will require them to depend on insurance benefits. Hence, insurance is not given as serious a thought as it should be and thus Australians are underinsured.
- No history of illnesses: People who do not have any history of major illnesses such as cancer, heart problems, diabetes etc in their family believe that they will never contract such illnesses. Hence, the prevailing thought is that they will be able to earn money throughout their working years and should thus be able to save enough to tide them through any financial difficulties that they face. This again could be one reason why they do not purchase adequate insurance.
However, accidents do not occur with warning and any earning member of a family could get injured when they least expect it. In such situations, if you are not adequately insured then you may not even have enough money to pay your medical bills, let alone manage your monthly living expenses.
Assessing Australia’s Underinsurance Problem: Debunking Insurance Myths
There are various myths surrounding insurance, which could be the reason for Australia’s severe underinsurance problem. Here is a look at some of these myths, with a view to finding out what the reality is:
- Insurance is only for those people who are not in good healthA lot of Australians believe that if they are in great health, they do not require insurance. Only those people who do not keep good health, or who have a long history of genetic illnesses in their family require insurance. Being in good health means they will live for years to come and can thus provide for their dependants without needing insurance. However, this type of thinking is completely erroneous. Insurance does not only protect you in case of injuries and serious illnesses, but also covers you for untimely deaths. Therefore, regardless of how great your health is, this does not lower your chances of a premature death through accidents. And if that were to happen, you could at least have the peace of mind that your family will be able to survive because you had the foresight to buy adequate insurance.
- Insurance policies are extremely costlyThis is perhaps one of the leading myths regarding insurance and could be the top reason why Australians are underinsured. Most people have the belief that insurance is way too costly and they would never be able to afford it. Even if they did end up buying a cover that they could afford, it would certainly not be the amount of cover they actually needed. However, this again is a myth and not a reality. Not only is insurance quite affordable, especially if you start planning early and buy insurance policies when you are young; but there are various tax benefits that you can take advantage of, which help to make insurance even more cost effective.For instance, insurance premiums that are paid for a life insurance policy that is taken through super fund are tax deductible. Also, as a person who is self employed, you may be able to get tax benefits for all types of insurance policies such as life insurance, total and permanent disability insurance, as well as income protection insurance. Due to the various tax breaks that you can avail of, the cost of insurance does become more affordable.
- Insurance companies never pay out claimsWhy would you pay your hard earned money towards insurance premiums when insurance companies never pay out claims when you need them? This type of thinking is very common and is a myth which leads to underinsurance. However, insurance companies do pay out claims and the money they pay out can be very useful to help you survive if you get injured or become sick. By opting for different types of insurance and making sure that you file claims in a valid manner, you can rest assured that you will be paid as per the benefits of your insurance policies.
- The government will take care of usIt is true that the Australian government does provide certain benefits to people who may lose their jobs or become unable to work, but the perception that these benefits will be enough to cover you and your family comfortably is extremely erroneous. Not only will you not be able to survive with government benefits, but the money hardly ever provides temporary support too. Therefore, you need to be responsible for your own future and should consider insurance to secure the same.
Debunking these myths may help to make Australians more aware about insurance and its advantages, which in turn could be the start to solving Australia’s underinsurance problem.
Impact of Australian Underinsurance
Here is a look at the impact 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 could 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 to provide for your family till such time that your income starts again. Since no one can predict when an accident or illness will strike, you may find that you need to sell off your investments when they are at their lowest possible value. However, with adequate insurance cover in place, you can use the benefits from your insurance policy for these expenses and do not have to worry about liquidating your assets cheaply.
Insurance is thus a very important matter and all Australians should have different types of insurance cover such as life insurance, income protection insurance, and medical insurance. Not only is it necessary to take out insurance, but the more important thing to remember is that you need to have the right amount of cover for your family’s needs.
