On average, Australians enjoy long lives but the flipside of that equation is that some people die young, and many of those who die young are parents.
One in five parents will become too sick or injured to work, or will die before retirement age, according to a disturbing report released during 2010, and this report remains relevant today.
The Lifewise/NATSEM Underinsurance Report states that 18 Australian families lose a working age parent every day, which translates into nearly 7000 families each year devastated by a loss of a parent.
Every year, 235,790 working age parents suffer a serious illness or injury and more than 17,000 of those sick or injured parents are forced to stop working permanently or for an extended period of time. Note that these figures are based on a 2010 report so presumably with Australia’s continuing population growth, these statistics are also increasing.
The National Centre for Social and Economic Modelling (NATSEM) conducted the research on behalf of Lifewise, an initiative funded by the life insurance industry and co-ordinated by the then Investment and Financial Services Association (which is now called the Financial Services Council). The main purpose of the report was to measure the social and economic cost of underinsurance.
I personally dislike ‘guilt and fear’ campaigns designed to motivate Australians to pay more for a product, but in this instance, I think the message is important. ‘Now’ is a good time to check your life insurance coverage, and other insurance, and ensure that you’re comfortable with what your family will receive if you die, or become too sick to be able to work. (You can find out how your super fund can deliver you insurance protection in the SuperGuide article Life insurance and super: 10 facts you should know).
Australians don’t have enough life insurance
According to the Lifewise report, 95% of families do not have adequate levels of insurance. The ‘big picture’ finding from the report was that due to underinsurance by most Australians, if a parent becomes ill or dies, then such an event, and the many events of illness and death, will cost the government $1.3 billion in additional social security payments over the 10 years from 2010 to 2020.
I have translated this grand statistic of $1.3 billion into people terms: underinsurance can mean financial hardship when the main income-earner, or secondary income-earner, or primary carer of children, becomes sick or dies.
The study measured the impact of four scenarios on a typical family. A ‘typical’ family involved a couple with two children under five, and the main income-earner worked full-time earning $75,000 and the secondary-income earner worked part-time earning $35,000. They have a mortgage. The report assumes that the male parent has $30,000 in super, $91,000 in life insurance cover, and total and permanent disability insurance of $71,000. The female parent has $14,000 in super.
The four scenarios measured in the report were:
- Husband dies
- Husband disabled and temporarily unable to work, or permanently unable to work
- Wife dies
- Wife disabled and temporarily unable to work, or permanently unable to work.
According to the report, the typical family would lose half or more of their income as a result of the death of a parent, or the serious injury or illness of a parent. Other findings from the report included:
- Based on current average levels of insurance, the typical Australian family’s weekly income will be cut by half to about $600 (after paying for childcare and mortgage) when the main income-earner (husband) becomes temporarily ill or injured and can’t work, or when secondary income-earner (wife) dies or becomes temporarily or permanently disabled
- The changes to the family’s financial situation will be devastating, and will last at least 10 years.
For the specifics of each scenario, and the findings for each scenario, click on this link.
The good news is…
The good news (yes, there’s good news) in the report is: when a family takes out the recommended levels of life insurance, the surviving partner can pay out the mortgage and re-invest the balance to generate an income that replaces 80% to 100% of the deceased partner’s income. The same deal applies when a couple takes out recommended levels of income protection insurance – an income that gives 80% to 100% replacement.
How then can an individual work out the recommended levels of life insurance for their personal circumstances?
The Lifewise website has a calculator to help you work out the answer for your own circumstances. Click on this link.
For most Australians, superannuation funds are the main suppliers of life insurance, total and permanent disability insurance and income protection insurance. Most large super funds also have useful calculators on the fund websites to help you work out the most appropriate coverage.
More articles about superannuation and insurance
For more information on super and insurance see the following SuperGuide articles:
- Life insurance and super: 10 facts you should know
- Comparing super funds: Top 20 cheapest funds for life insurance
- Comparing super funds: Top 20 cheapest funds for income protection insurance
- Cost shock: Paying too much for insurance in your super fund?
- Comparing funds: Which super funds offer the cheapest insurance?
- Four reasons to buy insurance inside your super fund
- SMSFs must consider life insurance needs
- SMSFs: Can I transfer my life insurance to my DIY super fund?
- SMSFs: If I die young, will my wife pay super tax on the life insurance payout?
- SMSFs: Trauma insurance is not OK