Financial exposure is the gap between the level of life insurance required to meet your basic needs and the level of insurance you actually have in place in case an unexpected health event occurs.
Financial exposure is a growing problem in Australia. This article looks at some of the reasons for this and why it’s important to minimise your financial exposure.
Australia has been found to be one of the most underinsured countries in the developed world.1 Rice Warner research identified that only 33% of the working population protect their most important asset — their ability to earn an income, yet 83% of Australians insure their car.2
Also, even though various research pieces have shown that the majority of us are concerned with what the financial impact of illness, accident or death could mean to us, there’s a massive disconnect between concern and action.
Research conducted by Zurich3 reveals that the main reason people don’t buy insurance is the perceived high cost and the low rate of incidence. However, claims data shows that one in three people will be diagnosed with cancer before reaching age 754, and that one in four people would consider insurance and are prepared to spend up to 10% of their salary to protect against serious illness or disability. One of the reasons why we are underinsured is our lack of knowledge of insurance options, leaving us unsure which solution is the right one for us.
Not having the appropriate levels of personal life insurance in place is a significant problem that many Australians face, though it is often only experienced when it’s too late.
Having insufficient insurance has far reaching impacts, from the financial cost borne by families to the sustainability of support services offered through the Government.
Underinsurance can lead to significant financial hardship for individuals and their families. Whether it’s your partner, your children or your extended family members, the people you’re responsible for can end up being adversely impacted if you are unable to work. If you’re ill and can’t afford a carer, family members may have to step in to provide you with the care you need. The impact can be long-lasting, potentially extending to the next generation in your family.
Although Medicare may provide you with access to fundamental healthcare services for a subsidised fee or at no charge, many services still have an out-of-pocket cost that is not covered by Medicare and is nearly double the spend of health insurance funds.5
Therefore, underinsurance not only affects individual families, it comes with major social and economic costs. This is mainly in the form of social security benefits with the annual cost to the Government amounting to $57 million for death and $1.26 billion for total permanent disability.6
As Australians, we are lucky to have one of the best superannuation systems globally. And, millions of Australians have life insurance policies through their super fund, providing lump sum benefits on death or total & permanent disability (TPD), along with short-term disability insurance.7 This makes up about 70% of all cover for Australians and has been the main reason why most of us have some form of life insurance already in place.
The benefits of having insurance through your super are numerous. Super funds are able to purchase policies in bulk and negotiate favourable pricing from insurance providers due to their scale. Insurance inside super will often have automatic acceptance, which means that no medical or disclosure of pre-existing conditions is required. The ability to pay premiums from your super and not from your after-tax income makes it an attractive way to access cover.
However, equally important is being aware of some of the limitations. For instance, the complexity around policy definitions and, more specifically, what constitutes a ‘disability’. This can vary greatly across different providers. In addition, you will also need to meet certain criteria before a benefit can be paid. This is called a ‘condition of release’ and it applies to both lump sum and income stream payments. In some cases, there may be adverse tax consequences when accessing your benefit, so it’s important to seek advice to minimise this and maximise the funds available to support you and your family.
Interestingly, the level of default cover, that is, the automatic level of insurance offered by super trustees upon joining a fund, varies significantly. Across the 10 largest industry super funds8 the average life insurance benefit for a 40-year-old office worker, is just over $255,000 for death cover and just over $156,000 for TPD cover; well short of the average household mortgage in Australia, which is around $391,000. This means many people wrongly assume the cover they have through their super fund is enough, even though research demonstrates this is not the case.
Determining your level of financial exposure and ensuring you have an appropriate solution for your life stage is a complex matter. It is important that you work with your adviser to better understand your insurance needs, to ensure you are not left caught out if something unforeseen were to happen.
1 Zurich, Understanding income protection gaps, 2016
2 Rice Warner, Underinsurance in Australia 2017 report
3 Zurich, Understanding income protection gaps: awareness, behaviour, choices, 2016
4 Deloitte Access Economics, AIHW, Medicare
5 Source: AIHW
6 Rice Warner, ‘Australia’s persistent life underinsurance gap’, 2015
7 Income protection or salary continuance insurance, which generally covers up to 75 per cent of salary
8 Research: As at Feb 2019, Australian Super, Hesta, Rest, First State Super, Care Super, SunSuper, MTAA, UniSuper, HostPlus and Media Super accounted for a total of over $518 billion in funds