Under-insurance still remains at critical levels among the Australian population despite the gap closing among lower-income earners due to default levels of cover offered through superannuation, research group Rice Warner has claimed.
Pointing to its recently-released Underinsurance in Australia 2015 report the group said that median level of insurance cover were well below those needed to meet basic needs which is defined as the minimum required to pay all non-mortgage debt and sustain the current living standard until age 65 or until children reach age 21.
Rice Warner said the median level of life cover meets only 61% of basic needs and the median life cover is only 37% of the income replacement level while median levels of total & permanent disability (TPD) cover and income-protection cover meet only 13% and 16% of their respective needs.
“…the median level of life cover meets only 61% of basic needs…”
The gap between the level of insurance required and the level currently held had closed over the 10 years the gap had been tracked by Rice Warner which stated “this results from higher levels of default cover within superannuation, increased focus on insurance by financial advisers and superannuation fund trustees, and an active direct insurance market”.
The group said that while group life insurance provided a large proportion of the total sum insured and monthly benefits of Australia’s insurance coverage median levels of cover in this sector were also too low and failed to meet basic needs of those insured.
“The median default cover of superannuation meets only about half of the basic death cover needs for households with no children and a much lower proportion for families with children (less than 25% for families with one child),” Rice Warner stated, adding that default insurance cover through superannuation funds aimed to provide for part of their members’ insurance needs.
“Superannuation funds have an obligation not to allow the costs of insurance to unreasonably erode members’ retirement incomes”
“The level of default life cover held by young single members is likely to be higher than their needs given that most have no children. In contrast, changing family formation patterns and higher debt levels at older ages means that default cover is often inadequate for older members.”
Rice Warner said superannuation funds could improve the adequacy and appropriateness of their cover by differentiating members’ default cover by marital status and the number of independent children, instead of using age as the only measure.
Super funds could also maintain a balance between cover at older ages and the erosion of balances, and encourage members to report life events and whether they have dependent children with this information used to better align default cover with member needs.
“Superannuation funds have an obligation not to allow the costs of insurance to unreasonably erode members’ retirement incomes. This requires trustees to carefully take account of insurance costs when considering the degree to which members’ insurance needs are met,” Rice Warner stated.
