Australia’s persistent life underinsurance gap

What is the state of Australia’s life underinsurance gap? Rice Warner pioneered the measurement of underinsurance in Australia for the main life insurance coverages – namely life, total and permanent disability (TPD) and income protection benefits. In 2015 we see some closing of the gap, thanks to mandatory superannuation and improved group life insurance policies.

But the problem of underinsured member lives persists, presenting continued opportunities for technological innovation, enhanced member engagement, some new thinking and further investment by funds.

The bottom line is that Australia still has a large underinsurance problem.

Rice Warner first reported this issue in May 2005. Our report showed that couples in their mid-thirties with young children needed at least 10 times their earnings as protection. Average wages were then $50,000 so a couple would have required life cover of approximately $500,000.

At the time, superannuation funds would have provided a default cover of approximately $70,000. Members might have thought they had adequate protection but they would have left their family with a large deficit had they died or become totally disabled. The average young family had only 15% of their life insurance need if they relied on the default cover within their superannuation fund.

Since then, default levels of cover have grown significantly and the gap for the typical young family has partly been closed. While the required life insurance is now approximately $680,000, the typical default cover is approximately $200,000 so the base cover has doubled to approximately 30% of their need. The situation is better for those without children as the coverage is approximately 60% of needs.

The cost of funding the gap? In terms of the life underinsurance category, Rice Warner estimates the total cost to government to be $57 million per year; while TPD underinsurance is calculated to be $1,258 million per year.

And for income protection, underinsurance is estimated at $260 million per year in cost to government.

For their part, Australia’s superannuation funds have tried to target the benefits better recognising that:

• Default levels were too low for too long.
• Single people generally do not need as much life cover as families.
• Buying a house and having a child are the key times when members are interested in life insurance.
• Many young people have a higher need for disability cover than death cover.
• The amount of cover should fall for many older people as they pay off their mortgages and have accumulated savings (family home and superannuation).

However, funds can only use proxies such as age and general population averages on insurance needs as they don’t know much approximately the personal circumstances of their members.

All leading funds now have calculator tools to assist members supplement their cover to meet their own personal circumstances. But, these are passive and rely on members to activate them – so usage is far too low.

Meanwhile, thanks to mandatory superannuation, life insurance is booming in Australia. Some 50% of the $14 billion of annual premiums in the life industry is now collected through superannuation. Group insurance schemes today pay life insurers nearly $5 billion in premiums which is a staggering 10 times the amount collected 20 years ago.

Some argue that this growth in life insurance is starting to take too much away from members’ retirement savings; others point out that life insurance within superannuation is cost effective and fills an important social need. The latter argument is strong, provided the premiums provide the right amount of cover.

Michael Rice, CEO