Rice Warner’s latest Underinsurance Research Report reveals the extent of the widening cost/reward divide in modern Australia

The comprehensive findings of new Rice Warner life insurance data today reveal the extent to which rising risk premiums must be weighed against the fundamental, long-term benefits of insuring a life, and providing an adequate financial safety net to more Australians when they most need it.

The Report shows that an average Australian couple aged 40 with children require life insurance cover of approximately 10 times annual earnings simply to repay debts and maintain current living standards.  This includes the current living standards of either partner or children until the youngest child reaches the age of 21.

However, in order for the family’s standard of living to be maintained in full, life insurance cover of 15 years income is required.  Similarly, total and permanent disability (TPD) cover equivalent to 15 years income is required.

The report provides a detailed analysis of the components of insurance needs ranging from housing costs to the costs of raising children and replacing the unpaid domestic services provided by a deceased or disabled family member. It also shows the contribution made by government social security benefits such as Family Tax Benefit, childcare benefit and rebates, and demonstrates that these provide only a modest contribution to meeting overall living needs, particularly for those on above average incomes.

Cost vs. Benefit

Life insurance costs have been increasing steadily over the past year, with average death and TPD insurance prices in employer based superannuation funds increasing by 10 percent between June 2012 and June 2013.

Some superannuation funds have increased prices by significantly more.  There is a danger that consumers will question the need for life insurance.

Other facts:

• The median level of life insurance cover across the working age population is 64 percent of basic life insurance needs, but only 42 percent of the amount needed to fully maintain the standard of living of remaining family members.
• Median levels of TPD and income protection cover are much lower, at 14 percent and 16 percent of needs respectively.

These figures demonstrate that the life insurance industry needs to focus on a deeper understanding of individual clients’ insurance needs, so that insurance offers can be targeted at those with the greatest need, rather than on raising levels of cover across the board.

This is particularly the case in relation to disability covers, notwithstanding the government’s new Disability Care Scheme (DCS). The DCS complements, rather than replaces, the need for life insurance cover.

Underinsurance is still an issue and a drain on the public purse

• The total cost to government of life underinsurance across Australia is $47 million per annum.
• The total cost to the government of Total & Permanent Disability (TPD) underinsurance is $1.26 billion per annum.
• The total cost to government of income protection underinsurance is $247 million per annum.