The consequences of being underinsured

Being underinsured means that you either don’t have enough life cover or lack the right type of cover. For example, you may have a death benefit, but no financial safety net should you be unable to work for a specific period due to illness or injury.

Sufficient life insurance is generally accepted to be at least 10 times your earnings. But alarmingly, six in ten people with dependents don’t have enough life insurance cover to look after their loved ones for more than one year if they were to die.

Fortunately, if you are concerned about possibly being underinsured, you can request the advice of a financial planner. 

An example of underinsurance is that of a two child family where both parents work to pay the mortgage, general household expenses and other financial obligations, like school fees. If one of the parents were to die suddenly and the lump sum payout is not enough to keep paying for these expenses, then they are underinsured.

If you are thinking of starting a family or already have young children, you will need more cover for when you die or become disabled.  Although your superannuation generally provides funds upon your death, it usually only covers about 30% of what your family will need.

Australia has been found to be one of the most underinsured nations in the developed world.

Why are we underinsured?

  1. The perception that life insurance is too expensive when in fact it costs you far more not to be insured than it does paying a monthly premium. You may find cheaper life insurance when you shop around and compare policies.

  2. A lack of trust that the life insurance companies will pay a claim. Although most Australians see life insurance as important, only a small percentage believe their life insurer will be there for them in times of crises.

  3. Not knowledgeable about life insurance and find it to be too complex. Many people feel lost in where to start and believe it will take them too much time to figure it out.

  4. Being young and healthy. Usually, the younger population thinks their dedication to diet and exercise makes them indestructible.

  5. Not seeing life insurance as a priority. Some people know they need insurance, but they haven’t “gotten to it” yet, or they don’t have kids, so think it’s an unnecessary expense. They have not contemplated the consequences of their mortality and the impact it might have on their loved ones.

If your savings is not enough to protect you and your family in times of crises, then you need life insurance. The best thing to do would be to speak to a financial planner  about how to cover the gap in your cover.

Being underinsured means your family could be financially vulnerable if something unexpected happened to you. The real cost of being underinsured is for you and your family potentially experiencing significant financial hardship, putting your lifestyle at risk. For example, a serious medical condition might have to be ignored due to lack of funds, and you as the policyholder might be forced to return to work out of necessity.

It’s also important to regularly review of your life insurance to ensure you have adequate cover, especially when you’ve recently progressed to a different stage of your life. Involve your family in helping you avoid shortfalls by requesting their input before making a final decision.

Policy premiums are generally cheaper when you are younger, so choose to get life insurance early in life. If you are still single, you might want to consider purchasing income protection, TPD and/or critical illness cover before buying life cover.

Consider buying enough to cover the cost of:

While increased pressure from rising fuel, food and electricity prices makes cutting insurance costs tempting, you need to review your policy with your broker, to prevent being exposed to financial losses as a result of being underinsured.

At the end of the day, we all just want to make sure our loved ones are taken care of after we’re gone. Insuring yourself and protecting your loved ones from financial hardship is one of the best decision you’ll make.

Insurance is confusing! So if you have any questions please reach out to us on 07 4151 8898 or email at 

Disclaimer: This content provides general information only, current at the time of production. Any advice in it has been prepared without taking into account your personal circumstances. You should seek professional advice before acting on any material.

The Money Edge Pty Ltd, t/a The Money Edge is a Corporate Authorised Representative of Akambo Pty Ltd t/a Accountants Private Advice (AFSL no. 322056) ABN 16 123 078 900 Level 14, 379 Collins Street, Melbourne, Victoria 3000.

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