Most Australians lack life insurance & are shockingly underinsured

18/03/2010

An article published in The Australian on 3 March 2010 discusses recent research commissioned by the Investment and Financial Services Association into the underinsurance of Australians. The research was released on 2 March 2010, saying that 95 per cent of families do not have adequate life insurance. This research also found that "the typical Australian family will lose 50 per cent or more of their income following the serious illness, injury or loss of one parent, as a result of underinsurance".

The research, carried out by the National Centre for Social and Economic Modelling, sheds new light on the problem of underinsurance. For the first time, dollar figures are put on how much life insurance cover a typical family needs.

It illustrates starkly why inadequate life insurance can wreck a wealth creation plan.

The statistics are sobering. The Australian Bureau of Statistics says that in calendar 2008 there were 12,430 deaths of married men or women of working age (20 to 64).

The IFSA/NATSEM report notes: "This equates to more than 34 families per day losing a member, and over half of those (52 per cent) involve children losing a parent."

It also says a 2008 report found that more than 235,000 working age people, living as a member of a couple with dependent children, had suffered a serious injury or illness in the previous 12 months.

And 17,000 working-age people living as a member of a couple with dependent children had been unable to continue working due to an illness or injury in the previous year.

The IFSA/NATSEM report found that one in five families will be "impacted by the death of a parent or a serious accident or illness that renders a parent unable to work during their working lives".

Underinsurance is a major economic issue for the country too: the IFSA/NATSEM research says it will cost the government $1.3 billion during the next decade.

But it has effects much closer to home, particularly for investors.

"If you think you can live on the dole, or that you can live on a disability pension, then don't get income protection insurance," says John Brogden, chief executive of IFSA.

"And if you think your family can survive and prosper financially without you, don't get life insurance.

"You cannot build your wealth and rely on unemployment benefits. And your family cannot build their wealth without an income coming into the house, if not two incomes."

Imagine for a moment that you have an investment loan or a margin loan, and you're diligently paying the interest bill each fortnight or month.

If your income were to cease, and you became unable to meet the interest cost, you'd find your lender selling your assets to recover its loan. Even the most meticulously planned investment strategy would grind to a halt. And since you have no control over when unfortunate events occur, you may find yourself (or your estate) having to sell assets at the worst possible time.

But, even more generally than that, a major illness or trauma can lead to big medical bills. It's not a smart strategy to set yourself up to have to sell investment assets to pay the bills. When the IFSA/NATSEM report suggests a typical working couple needs $1 million of term life insurance to meet debts and provide income for a few years afterwards, it becomes clear how much of a financial strain a death or serious illness or injury can put on the typical family's finances if they're inadequately insured.

That is why life cover is the foundation of any comprehensive wealth creation plan. Without a properly laid foundation, anything you build on top of it is at risk of falling over.

The IFSA/NATSEM report says the recommended level of life insurance is equal to a family's existing level of debt, plus seven times three-quarters of the individual's disposable income (because many costs associated with working no longer exist if you're not working).

Disposable income is defined as "total private [earned] income of the person plus transfer income plus childcare tax refunds received, less income tax and Medicare levies". Income protection insurance is designed to provide 75 per cent of a person's existing income, again, because many expenses associated with working disappear once the individual stops working.

"Many more Australians than we ever thought have injuries, accidents or die during their working lives," Brogden says. "The critical benefit that life insurance gives to them and to their dependents is an income stream at these times.

"The big initiative [in the report] is that we're putting real dollar [figures] on the benefits of life insurance. Australians are, particularly compared to their compatriots in the developed world, shockingly underinsured. I don't know whether it's the she'll-be-right attitude, or they think it will never happen to them, or they think the government will take care of them.

"But in my own life there are two people who have relied on income protection insurance. Neither would have thought they were going to get ill; neither had a history of illness in their family. And both were at the highest-earning point of their lives.

"They both had income protection insurance, and it saw them through a critical time in their lives."

Source: The Australian, 3 March 2010