Undercovered and overexposed

Have you forgotten something?

By world standards, Australians are financially sophisticated. Between us we have almost one trillion dollars invested in superannuation and one of the highest rates of share ownership in the world.

But if we’re so smart, why are we so badly underinsured? Most financial experts suggest insurances such as income protection, life insurance, trauma cover and Total and Permanent Disablement (TPD) are an important part of any good financial plan.

So why:
  • Is there a 1.3 billion dollar gap between the life cover Australians have and what they need? 1
  • Are 70% of small business people doing business without income protection (even though it’s tax deductible)?2
  • Do only 4% of average working families with children have the life cover recommended by experts to cover their needs? 3

Is it because we’re enjoying the fifteenth year of an economic boom? Or is it that insurance is so intangible, so invisible, that we don’t think it’s worth the money? Whichever it is, it’s a dangerous error — because the line between a comfortable lifestyle and financial distress can be thinner than you think.

Here’s why:
  • On average, Australian families now need 35.2% of their income to pay off their average home loan. 4
  • According to a recent AMP/Natsem study, it costs around $310 a week to raise two children.3
  • There is a one in three chance you will need to be off work for three months due to illness or injury before you turn 65.5
  • A third of males and a quarter of females will be hit by a major illness like cancer before they turn 75. 6
  • Almost a third of the Australians over 45 who retire early, do so due to ill health and injury. 7

In short, many Australians are not just underinsured, they are overexposed, carrying large amounts of debt, without the backup they need if injury, illness or early death strike.

Got yourself covered? How does your personal balance sheet stand up to the insurance test?
How much do you owe?
Mortgage  
Credit Cards  
Personal loans  
Total  
What are your repayments on these commitments each month?
Mortgage  
Credit Cards  
Personal loans  
Total  
How many month's worth of salary do you have in the bank?
And what is that worth?  
How much insurance do you need?
Time off work with illness or injury Income protection insurance generally provides up to 75% of your gross monthly income, enough to give you time to recover without dramatically cutting into your family’s lifestyle
Major medical bills after an accident? You can often package trauma cover with Life and Total and Permanent Disability (TPD) insurance to make sure
you cover all life’s risks cost-effectively.
The death of the family’s main breadwinner?
 Analysis by Investment and Financial Services Association (IFSA) and actuaries Rice Walker suggests a working couple in their mid-thirties and with children need life insurance cover of at least 10 times their taxable annual earnings.
A long term injury that prevents you from working in your current job?
 Don’t forget the contribution a non-working partner makes to the family’s fortunes! Given the cost of outsourcing domestic work, taking out a TPD policy on the stay-at-home partner could be a wise decision
Closing the gap could cost less than you think

One of the key issues people raise when considering insurance is the cost.

Many people think of insurance as a ‘luxury’ and as expensive, but the reality could be quite different. Closing the insurance gap and ensuring you have sufficient cover to protect you and your family, could cost less than you think. The examples in the table below show that for less than $3 a day, a 45 year old non-smoking male could take out $750,000 death cover, as well as TPD cover. Not much, when you think about it, is it?

Insurance What it does What it costs
Life Pays your beneficiaries a lump sum when you die. Less than a newspaper: around $2 a day for $750,000 cover.
Total and Permanent Disablement Pays you a lump sum if you are unlikely to work again due to a total and permanent disability Less than a coffee and a muffin: around $3 a day for $750,000 death and TPD cover.
Trauma Pays a lump sum if you suffer one of a range of specified illnesses or events - such as cancer, a heart condition or the loss of a limb. Less than a cafe lunch: around $7.20 a day for $500,000 trauma cover.
Income Protection Replaces around 75% of your income if you are sick or injured and cannot work. Less than a chocolate bar: around $1 a day to provide income protection of $3,000 per month, and the premium may be tax deductible.

Obviously, the cost of insurance for you will depend on your individual circumstances and insurance needs, so speak with your adviser for more information.

Who can help?

The right mix of insurances can protect you and your family from financial distress if unfortunate events occur. With the right insurance in place you are far less likely to have to draw down on your savings, or put your home, your children’s education and your long-term plans at risk, because you haven’t protected yourself against disaster. Your financial adviser can help you arrange those insurances, find you the right products at the right prices, and make sure your insurance arrangements are integrated into your overall financial plan. They can help you achieve peace of mind. Talk to your financial adviser today.

  1. Investment and Financial Services Association (IFSA), Insurance Fast Facts, October 2005
  2. IFSA media release, Consumer guide to smarter insurance, 3 November 2006
  3. IFSA media release, Life and risk sales up - Aussies hear wealth protection message, 26 April 2007
  4. Real Estate Institute of Australia (REIA) media release, Low affordability challenges gen x,y, 8 March 2007
  5. Institute of Actuaries of Australia, 2000: Interim Report of Disability Committee
  6. The Cancer Council Australia, Facts and Figures, December 2004
  7. ABS, Retirement and Retirement Intentions Australia, August 2004 - June 2005, Catalogue no. 6238.0