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Recent research on personal insurance clearly identifies underinsurance as a major issue in Australia. Though not pleasant to think about or talk about mortality, the reality is that many families would have inadequate insurance cover and financial resources to maintain their lifestyle and ensure their financial security in the event the main income earner was unable to work due to injury or death.

Financial needs

In a 2005 report commissioned by the Investment and Financial Services Association (IFSA) titled The Cost of Underinsurance Project - Analysis of Life Insurance Needs, Rice Warner Actuaries completed a financial needs analysis and recommended the following:

Parents with young children
The financial needs of parents in their mid thirties working full-time and with young children were estimated to range from arounderund 10 times to 13 times their taxable earnings. Based on an average full-time salary of $50,000, this equates to life insurance cover of $500,000 - $600,000.

Parents with older children
The financial needs of parents in their mid forties working full-time and with older children were estimated to range from around 6 to 9 times taxable earnings. Based on an average full-time salary of $50,000, this equates to life insurance cover of $300,000 - $450,000.

Average insurance payouts

The Investment and Financial Services Association (IFSA) collected data on claims paid over the 2008 calendar year from 13 life insurance companies. Collectively, these insurers represented 90% of the life insurance industry by premium and lives insured.

Life insurance claims payouts during 2008 show average payouts were significantly lower than the financial needs identified by Rice Warner in their 2005 report, highlighting the underinsurance issue:

Factors leading to underinsurance

Perhaps the single greatest is the belief held by many individuals that 'it won't happen to me'. This in itself suggests a lack of awareness of the real risks of death, becoming permanently disabled, or becoming injured and unable to work. A number of other factors also contribute to underinsurance in Australia:

• Low levels of awareness of life insurance and the need for cover
• A lack of knowledge of the actual cost of life insurance, and a perception that it is too expensive
• A lack of understanding of life insurance, and a perception that it is too complicated
• A general aversion to thinking about mortality and discussing life insurance

For more information please visit Lifewise, a public awareness initiative aimed at educating Australians about the need for personal insurance and the risks of underinsurance.