The insurance gap

A key consideration with personal financial planning is whether levels of life, total and permanent disability (TPD) and income-protection insurance are adequate for an individual’s personal and family circumstances.

Most Australians obtain their life, disability and income-protection insurance through their large super funds with many relying on their funds’ default cover.

Rice Warner Actuaries’ latest Underinsurance Australia report, released over the past week, that points to a huge gap between the level of insurance needed and the level of insurance actually held.

And significantly, Rice Warner offers options for the big super funds, the insurance industry and government to help address the insurance and more closely focus on the levels of insurance needed as we move through different stages of our lives. A more targeted approach was more cost-effective than raising insurance cover across the board.

The 115-page report suggests that the super funds could:

  • More closely tailor insurance cover for younger people to reduce the possibility of over-insurance given their typically more limited liabilities and responsibilities.
  • Maintain insurance for older members. Many funds reduce their default insurance cover as members grow older.
  • Encourage members to report to their funds “life events” – such as having children, taking a home loan and children becoming financially-independent. This would assist funds to fine-tune insurance products to their members’ circumstances.

A core message from the report is that insurance cover should reflect needs. This might, the report suggests, funds reconsidering the “fundamental design” of their TPD and income-protection insurance.

In turn, this report may prompt some individual fund members to review whether their insurance cover is adequate without jumping to the assumption that their funds’ default cover is sufficient for their circumstances.

By Robin Bowerman
Smart Investing
Principal & Head of Retail, Vanguard Investments Australia
5th December 2013

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