Research has consistently shown that most Australians are underinsured and do not possess a level of cover sufficient to protect themselves and their family’s way of life. In Australia, over 5 million families have dependent children but only 4 per cent of these families possess insurance which will allow them to maintain their current lifestyle for 10 years or more.
While this issue affects most Australians (including singles and young couples) the most vulnerable section of society is families with dependants. This is generally because people underestimate the amount of money required to raise a child in the long term.
Unexpected costs
The National Centre for Social and Economic Modelling (‘NATESEM’) has estimated that the cost of raising a child from birth until they finish their education for a typical Australian family is between $474,000 and 948,000. Importantly, this amount does not include private school fees. Could your family afford to spend over $474,000 per child over their lifetime, in addition to your normal household expenses? Most couldn’t. Without a plan in place many families will strike financial hardship if something happened to their major income earner or primary carer.
Calculating your insurable risk
The difference between the amount needed to continue your family’s lifestyle and your current assets is called an ‘Insurable Risk’. Your Insurable Risk is calculated by determining the total lump sum required to fund your family’s ongoing income into the future and adding this figure to the lump sum required to extinguish all your debts, pay for any medical expenses and your funeral costs. We then determine the total value of your current assets and subtract this ‘current asset pool’ from your future financial requirements. ‘Insurable Risk’ tells us what your family’s potential financial risk is to an unplanned event. We subtract from this any existing insurances and we are left with your ‘Insurance Shortfall’. Some families have adequate assets to cover their insurance shortfall, but the vast majority of Australians do not. As a result, Australia is one of the most underinsured nations in the developed world, ranked 14th out of 32 for life insurance density and penetration.
Where to from here?
Sadly, most Australians discover (sometimes too late) that their only life Insurance cover – that default cover contained within their superannuation fund – is insufficient to meet their insurance shortfall. The best course of action is to speak with your financial adviser to review your risk management plan to determine the most efficient and affordable way to ensure you have sufficient life insurance to cover everything life sends your way.
