Rising Debt Levels Adding to Underinsurance Burden

The Association of Financial Advisers (AFA) has called on the Federal Government to seriously engage with consumers on issues linked to increasing levels of household debt, before banning commissions for life insurance advice.

The Association has drawn on various research findings over recent times to paint the picture of an Australian family environment that is now experiencing the highest household debt to disposable income ratio in the world.

This spiralling debt ratio, brought about in part by increasing property prices and generally lower interest rates, is exposing individuals and families to more severe financial and lifestyle consequences if something should happen to the main income earner.

AFA President, Dr Jim Taggart, said the high level of household debt is not necessarily a problem if families keep earning enough income to service it, but… “Unfortunately, what often happens when disaster strikes a main income earner is that the family can’t service that debt, because they either don’t have insurance or their level of insurance is woefully inadequate,” he said.

Dr Taggart added that families who can’t service their own debt not only risk losing their homes, but ultimately place a burden on the public purse.

The AFA’s point to the Government is that it should be taking aim at the serious and worsening consequences to family lifestyle aspirations and to the additional pressures that will be placed on the Government’s social security purse as a result of a worsening underinsurance equation, before it considers a ban on risk commissions.

banning risk commissions… would have a much more serious downside than any improvement in consumer confidence that may stem from a total ban on all commissions…

The Association is effectively arguing that banning risk commissions, especially in light of these research findngs, would have a much more serious downside than any improvement in consumer confidence that may stem from a total ban on all commissions, including risk.

The AFA has published an Insurance Fact Sheet, set out below, drawn from a number of research sources, to emphasise its point:

Household Debt

• National average mortgage in Australia – $283,000 (i)
• Monthly repayments on average mortgage – $2,062 (ii)
• Average credit card debt – $3,244 (iii)
• Full-time earnings (seasonally adjusted wages) – $64,594 (iv)

Life Insurance Claims Made to Australian Families and Businesses (v)

• Total claims – $3.045 billion
• Term life insurance – $1.6 billion
• Income protection insurance – $697 million
• Trauma insurance – $334 million
• Total and permanent disability insurance – $370 million

Likelihood of Serious Illness (vi) [see also IP Adviser Tool to Engage Clinets]

• 50,000 Australians have heart attacks every year
• One third of women and a quarter of men will suffer cancer at some stage in their lifetime
• More than 42,000 people were expected to die from cancer in 2009
• Half of all men and a third of women will be diagnosed with cancer before the age of 85

The Under-insurance Gap (vii)

• Life insurance cover within super is on average only 20% of what is required according Rice Warner Actuaries
• Only 4% of Australian families with dependent children have adequate levels of insurance cover, meaning Australian families are critically underinsured by $1.37 trillion, according to research commissioned by IFSA in 2005

“We urge Canberra to take a long hard look at the statistics around life insurance and seriously consider the impact of introducing any measures that are likely to discourage Australians from taking out insurance that protects them against the financial impact of death and disaster,” said Dr Taggart.