Weighing up the value of life insurance

It probably comes as no surprise to anyone that there is a significant underinsurance gap between what we would need to maintain our standard of living should the unthinkable happen, and what we are actually covered for in the way of insurance. 

Australia is one of the most underinsured nations in the developed world, ranking 16th for life insurance coverage.i

There are lots of reasons people give for not buying life insurance, but top of the list is invariably cost. Sounds reasonable enough, especially when households are under pressure from increasing costs of living. But dig a little deeper and it turns out the way we weigh up decisions when outcomes are uncertain is not always in our best interests. 

According to something called ‘Prospect Theory’, people fear a certain loss more than they value a larger but uncertain gain. We tend to view money spent on insurance premiums as a loss, unlike money spent on a daily cup of coffee, a pair of shoes or a weekend away, which deliver immediate rewards. 

There’s also a disconnect between what we say we value and what we spend our money on. 

Thinking about the unthinkable

When asked, most people say the thing they value most is family. Yet when it comes to insurance many of us cover our car and our home but overlook our most important assets - our life, our ability to earn an income and the wellbeing of the people who depend on us. 

Thinking about being diagnosed with a terminal disease, suffering a disabling accident or contemplating your own death or that of your partner is uncomfortable. Seeking cover for those possible eventualities is something that is very easy to put off or avoid altogether. 

The real value of life insurance is the peace of mind, that if we die or become seriously ill and are unable to work then the right amount of money will go to the right people when they need it most. 

Types of life insurance

There are different types of life insurance. Death cover provides a lump sum if you die or are diagnosed with a terminal illness. Total and permanent disability (TPD) pays a lump sum if you are permanently disabled due to an accident or illness and unable to work again. Trauma Insurance (critical illness insurance) pays a lump sum on the diagnosis of one of a list of specific illnesses such as a heart attack, cancer or a stroke. Income protection provides a monthly payment if you can’t work due to illness or injury. 

The amount of life insurance you need depends on your family circumstances, your income and lifestyle. While many working Australians have default cover in their super fund, that’s no cause for complacency. It’s often a basic level of cover, which may need to be topped up outside super. 

Take Chris, aged 30. He has a partner, two children and the median level of default life insurance cover in super for someone his age. That is, $211,000 in death cover, $162,500 for TPD and $2,250 a month for income protection. According to a recent report by Rice Warner, the amount someone in Chris’s position needs is closer to $704,000 of death cover, $910,000 of TPD cover and $4,150 a month of income protection.ii

Paying life insurance premiums won’t provide the instant pleasure hit of an espresso, but most people would be surprised to know that the peace of mind that comes from protecting their family’s financial security costs less than their daily cup of coffee. 

Rice Warner estimates the cost of death cover and TPD cover for the average working Australian at less than 1 per cent of salary, and less than 0.5 per cent for white collar workers.iii Which begs the question, what cost do you put on the wellbeing of the people you love most? 

If you would like us to help you work out the appropriate level of life insurance for your family, and the best way to achieve it, give us a call. 
 

i Swiss Re Economic Research & Consulting, 2007
ii Underinsurance in Australia 2017, Rice Warner. 
iii www.ricewarner.com/rice-warners-affordability-study-how-affordable-is-group-insurance-in-superannuation/

Three insurance myths exposed

In the unlikely event that you break a leg or, heaven forbid, die prematurely you and your family have got it covered, right? You’ve got life insurance care of your super fund, not to mention that pricey health insurance policy. And if worst comes to worst, there’s always a government pension to fall back on, isn’t there?

Actually, most Australians don’t have nearly enough insurance. The nation’s underinsurance gap has been estimated at a whopping 1.8 trillion dollars.i Part of the reason for that is the trio of misconceptions outlined above.

Let’s go through them one by one.
 

Myth one:
My super will cover me

The reality is that the overwhelming majority of people that have insurance attached to their super are underinsured. One in two super fund members has less than half the life insurance cover they need. Nearly three quarters are underinsured for total and permanent disability cover.ii

Here’s another sobering statistic: Rice Warner found a couple in their mid-thirties with young children would need at least $680,000 worth of life insurance cover. The default super fund cover was just $200,000 – less than a third of what’s required.

Super policies typically don’t automatically include income protection or total and permanent disability (TPD) cover. While it’s true that many super funds will allow you to purchase these types of insurance, often at an attractive price, you’ll almost always have to contact your fund to put special arrangements in place. What’s more, trauma insurance is not available inside super.

If you haven’t already, you should read over your super policy carefully or contact us to determine exactly what kind of insurance is being provided. You’ll likely find the money your super fund would pay out in the event of a calamity is far less than you imagine.
 

Myth two:
My private health insurance will cover me

Private health insurance is a wise investment, but even at the highest level of cover it won’t even cover the full amount of your medical bills. And it certainly won’t pay the mortgage or other everyday living costs such as utilities, groceries or school fees.

Granted, there are moves afoot to allow private health funds to provide more comprehensive cover, possibly eliminating costs such as gap fees. But, by definition, health funds will only ever cover health costs and only until a set monetary or time limit is reached.
 

Myth three:
The government will look after me

The Australian government does provide a range of payments to support people if illness or disability leaves them unable to work. But unless you lead an extremely modest lifestyle, trying to survive on a pension is an enormous challenge. The Disability Support Pension currently provides $867 a fortnight if you’re single and over 21, or $653.50 a fortnight for each member of a couple.

That translates to $433.50 a week for a single person, or about 65 per cent of the minimum wage. Interestingly, the government also estimates the average person under 35 spends $869 a week on living expenses – which provides some idea just how tough it is trying to make ends meet on a disability pension.
 

The truth will set you financially free

In a worst case scenario you or your family would be unlucky to be left entirely on your own to cope. Your super and health funds, the government and possibly even friends, family and charitable organisations might provide some assistance.

But wouldn’t you prefer to know that in the event of a serious health challenge you have the right level of insurance cover? That you and your family wouldn’t need to worry about financial issues on top of everything else?

If so, call us to discuss whether your current level of insurance is appropriate to your situation.

i ‘Underinsurance in Australia’, Rice Warner, July 2015

ii www.lifewise.org.au