Underinsurance is costing the federal budget over $1 billion as injured and ill people are pushed onto social welfare payments, according to the Association of Superannuation Funds of Australia in a submission to the Parliamentary Inquiry into Life Insurance.
Given that most of the life insurance cover Australians have is delivered through superannuation, the cost to the welfare budget would be much higher without Australia’s universal super system, the submission observes.
A submission to the same inquiry from Industry Super Australia and the Australian Institute of Superannuation Trustees found that life insurance premiums in super account for half, or about $7 billion, of the $14 billion premium bill Australians pay annually.
Insurance held through super is also considerably cheaper than that bought directly from insurers or through advisors. Premium for a given level of cover across age groups between 30 and 60 is between 25 per cent and 55 per cent less in super for females than for policies outside.
For men across the same age cohorts the difference is between 35 per cent and more than 60 per cent for men. For both genders the differential increases with age.
The evolution of group insurance through the compulsory super system has resulted in up to 92 per cent of the working population having coverage. And workers appreciate the value of in-super policies with only 5 per cent choosing to opt out of premium payments while 15 per cent have chosen to “opt up” or increase the value of their cover.
However, despite the expansion of coverage, underinsurance is widespread with only 21 per cent of having the level of total and permanent disability cover (TPD) necessary to provide adequate protection. That underinsurance equates to a $10,870 billion in protection levels.
Basic life insurance is also below what is necessary by $471 billion and income protection by $3,436 billion. The chart below, sourced from Rice Warner data, illustrates the point.
Research from life insurer AIA Australia shows that insurance coverage gives workers a significant improvement in their sense of financial security. Those without life insurance are more likely to feel the effects on a family of the loss of the principal earner’s quicker than those with insurance.
A large group of those without insurance don’t know how long it would take to feel the effects.
Income protection is seen as one of the most valuable components of life insurance. When asked to rank the different types of benefits by AIA, almost a third (28%) ranked income protection as the most important component to them in their overall life insurance package, second only to death cover itself.