Going undercover

The holding of adequate life, total & permanent disability and salary-continuance insurance is a critical part of sound personal financial and wealth management.



Unless our personal insurance cover is sufficient, the death of a partner or loss of a job can undermine the ability to maintain our family's living standards, pay debts and to keep savings at least intact.

The list of personal finance implications – let alone non-financial issues – of being underinsured seems almost endless.

Yet the recent Underinsurance in Australia 2015 report, published by actuaries Rice Warner, calculates that the median level of life cover meets just 61 per cent of basic needs. (These needs are defined as the minimum amount required to pay all non-mortgage debt and sustain current living standards.)

Moreover, the median life cover is calculated to meet just 37 per cent of income-replacement level of insurance. This is the level necessary to replace the expected net income of the insured and maintain living standards.

And the median levels of total & permanent disability (TPD) cover is calculated to meet only 13 per cent of needs while income-protection cover will meet just 16 per cent of needs.

The level of underinsurance for parents with young children is much higher than suggested by the median levels of cover, the report emphasises.

Millions of Australians of course gain life, TPD and income-protection insurance through their super funds' default cover.

Unfortunately, a fundamental trap for super fund members is to assume that the default cover is adequate for their families' circumstances. Chances are it isn't.

Rice Warner calculates that the median cover of super meets only about half of the basic life cover needs for households without children and a much-lower proportion for families with children.

Significantly, the report stresses that default cover through super is intended to provide for only part of a member's insurance needs. This point underlines the need for individual members to take the initiative to ensure their level of insurance is sufficient – perhaps with the guidance of a financial planner.

A useful starting point may be to consider feeding your family's details into several online insurance calculators provided by large super funds. This should provide an insight into the level of cover needed and the possible costs involved.


Robin Bowerman,
Head of Market Strategy and Communications at Vanguard.
14 September 2016