Is life insurance necessary?
Before considering ‘Should I have life insurance’, you need to determine what’s important to you. For most people, the most important thing in life is the welfare of their loved ones. Sometimes life doesn’t go as planned, so it’s important to consider the impact on your family’s future if you were to suffer a major injury or illness, or an untimely death.
Australia’s life underinsurance gap
However, a large proportion of Australians remain relatively unprepared for these possibilities, where their family income after the event may be substantially lower than it is now. Where this income shortfall cannot be funded from existing assets, it will need to come from another source such as a life insurance benefit. This difference represents a life insurance gap. In many cases, the gap will be significant due to the inability or reduced ability to earn an income while incurring additional expenses such as medical costs, and making provision for planned future expenditure such as children’s education.
Recent research from Rice Warner underlines the serious underinsurance problem that persists in Australia, including the following key findings:
o The median level of life cover meets only 47% per cent of basic needs.
o The median level of life cover meets just 28% of the amount needed to ensure that family members and dependants can maintain their standard of living after the death of a parent or partner.
o The median level of TPD cover meets only 14% of needs.
o The median income-protection cover meets 21% of needs.
o Only a third of the working age population have income-protection cover.
Finding out what life insurance coverage you need
A common misperception is that the default cover within superannuation funds will be sufficient to meet the need should it arise. However, Rice Warner indicated that the average level of default life cover within superannuation is around $200,000, whereas the average young family is estimated to require $700,000. Trustees need to strike a balance between the level of default cover provided and the associated costs and the long-term impact on member’s retirement savings. Therefore, as the evidence suggests, default cover within superannuation should be viewed strictly as a starting point.
Similarly, the safety net provided by government benefit payments or WorkCover is limited at best. Safe Work Australia reports that the median compensation paid from WorkCover following an injury at work is only about $10,000. This is for “serious” claims where one or more weeks of time off work was required. For all else, most government payments are means tested, relatively modest, and do not correlate with individual expenditure requirements.
Choosing the right life insurance
The best approach is to put the right amount of cover in place for your family’s circumstances, and ensure it is structured in the right way to save money and deliver the best outcome in the event you need to claim. This can get fairly complicated so it’s a good idea to discuss it with your financial adviser first.