When it comes to life insurance, there isn't a "one-size-fits-all" level of cover that will suit everyone. The appropriate amount of insurance takes into account individual needs and circumstances including (but not exclusive to) marital status, number of dependants, current and future financial obligations, income, as well as lifestyle and aspirations. The optimum amount of cover is affordable yet sufficient enough to make sure that in the case of an insured event the policyholder is not underinsured.
Are you underinsured?
The 2010 Lifewise / NATSEM underinsurance report has revealed that 95 percent of families do not have adequate life insurancei. Over 40% of people avoid thinking about life insurance, claiming that it is too complicated to comprehend, while 25% of people admit that they don't even know where to startii. But the sobering reality is that many of us will experience an insurable event in our lifetime and people with insufficient life cover risk their family's lifestyle and financial futureiii.
In 2005-06, almost 25,300 people of working age (15-64 years of age) were hospitalised due to transport accidentsiv and in 2008 there were 1,464 people killed in road crashesv. The leading underlying cause of death in Australia in 2010 was Ischaemic heart diseasevi, which claimed 21,701 lives in 2010. It is also predicted that in Australia one in two males and one in three females will have cancer in their lifetimevii.
All in all, almost 236,000 working age parents in Australia suffer a serious illness or injury, and every year over 17,000 are forced to stop working, either permanently or for an extended period of timeiii.
More than one in five families will be impacted by an accident, sickness or death that renders a parent unable to workviii. As a result of underinsurance, a typical family loses half or more of their income when any of the aforementioned events occurix.
Factors to consider
Your optimal level of cover will depend on your income, marital status, whether you have joint assets with another person, the number of children you have who are dependent on your income and how much longer you expect to be financially supporting them. Life insurance also has to take into account current and future financial liabilities. These include outstanding credit card or mortgage debts, day-to-day household expenditure,school fees, and lifestyle costs. It is important for the payout to cover all these responsibilities, while leaving enough money to pay for family holidays and celebrating life's special occasions such as your child's 21st birthday celebration or wedding ceremony.
So what are you really risking?
When assessing your insurance needs, it is important to calculate current and future liabilities with regard to the number of years you expect to continue in employment and earn a steady income. Most importantly, you should take out life insurance to help protect your family's financial future, and so you can avoid falling into the underinsurance trap and risk financial insecurity for your family in the event of an accident, illness or fatality.
i Kelly, S. & Vu, Q.N., 2010, The Lifewise/ NATSEM Underinsurance Report, Understanding the social and economic cost of underinsurance, http://www.lifewise.org.au/downloads/file/aboutthelifewisecampaign/2010_0203_LifewiseNATSEMSummaryA4FINAL.pdf, p.2
ii Lifeswise, 2012, Industry facts page: A
range of factors stop Australians from insuring themselves, http://www.lifewise.org.au/old-site/about-the-lifewise-campaign/the-facts-about-the-issue.aspx.html
iii Kelly, S. & Vu, Q.N., 2010, The Lifewise/ NATSEM
Underinsurance Report, Understanding the social and economic cost of underinsurance, http://www.lifewise.org.au/downloads/file/aboutthelifewisecampaign/2010_0203_LifewiseNATSEMSummaryA4FINAL.pdf, p.3
iv Berry, J.G. & J.E. Harrison, 2005-06,
AIHW Injury Research and Statistics Series No. 42: Serious injury due to land transport accidents, accessed at, http://www.aihw.gov.au/WorkArea/DownloadAsset.aspx?id=10737420071, p.vii
v Department of Infrastructure, Transport, Regional department and Local government,
2008, Road deaths Australia 2008 Statistical Summary, http://www.infrastructure.gov.au/roads/safety/publications/2009/pdf/rsr_04.pdf
vi Australian Bureau of Statistics, 2010, Causes of death, http://www.abs.gov.au/ausstats/abs@.nsf/Products/6BAD463E482C6970CA2579C6000F6AF7?opendocument
vii Australian Institute of Health and Welfare, 2011, New look
for AIWH cancer stats, http://www.aihw.gov.au/access/201103/data/cancer-stats.cfm
viii Kelly, S. & Vu, Q.N., 2010, The Economic Cost of Underinsurance for a Typical Family, http://www.lifewise.org.au/downloads/file/aboutthelifewisecampaign/2010_0203_LifewiseNATSEMSummaryA4FINAL.pdf, p.5
ix Kelly, S. & Vu, Q.N., 2010, The
Economic Cost of Underinsurance for a Typical Family, http://www.lifewise.org.au/downloads/file/aboutthelifewisecampaign/2010_0203_LifewiseNATSEMSummaryA4FINAL.pdf, p.2