Shadforth Insurance Specialist Kunaal Parbhoo, in the first of a three-part series “Shedding Light on Financial Exposure” for Legalwise News, discusses the under-insurance problem in Australia. People leave themselves exposed financially if they lack a documented risk mitigation strategy in the event of an unexpected medical episode, he writes.
Shedding light on financial exposure
This three part series discusses the financial exposure that clients face by not having a documented risk mitigation strategy if an unexpected health event were to occur. The series takes a considered look into the ever expanding problem of people being under insured in Australia; the challenges that SMSF trustees face in meeting their obligations; and offers some suggestions on how you can best direct clients when you identify a gap in their succession plan strategy.
Part 1: Exploring the underinsurance problem in Australia
Australians have been found to be one of the most underinsured nations in the developed world.[i] Rice Warner research identifies that only 33% of the working population have protected their most important asset – their ability to earn an income; yet 83% of Australians insure their car[ii].
There is no single cause of the underinsurance problem, however I try to explore some of the underlying issues in this article.
We, as a nation, have become over reliant on our government. Whether it is via compulsory superannuation or our social security system, there is an inherent expectation that financial support will be provided when an unexpected health event occurs. Not having the appropriate levels of life insurance in place is a significant problem that many Australians face, however is only truly experienced at a time when it’s needed and is too late. Rice Warner’s Underinsurance in Australia 2017 report sheds much needed light on the ever expanding void between the level of insurance needed and the level of insurance in place. The data reveals a clear pattern of underinsurance reaching back more than 15 years, and it’s that gap that we as advice professionals are trying to reduce through community education and awareness.
The impact of underinsurance
Having insufficient insurance has far reaching impacts. Significant underinsurance not only restricts the lifestyle the claimant and their family can have after an unexpected event, it also incurs substantial cost to government mainly in the form of social security benefits, with an annual cost to the government being $57 million for life insurance and $1.26 billion for total permanent disability.[iii] Also, there is the generational effect it can have on people’s families.
Insurance through super
As Australians, we are lucky to have one of the best superannuation systems in the world. According to Rice Warner research, group insurance through superannuation makes up about 70% of all cover for Australians and has been the main factor in reducing Australia’s underinsurance problem. However, it is this underlying safety net that has contributed, in part, to the underinsurance issue. In other words, many people assume that the cover they have through their super is enough, even though research shows this is false. Over the years this underinsurance epidemic has manifested on our over reliance on insurance being provided through superannuation, and along with government assistance has masked the growing concern from a broader social and economic perspective.
Complexity and public confidence
Another school of thought in regards to our disengagement as a nation is the lack of public confidence in life insurance. A recurring theme of both media investigations and regulatory reviews in the last few years, has been that life insurance products are often complex, poorly understood by consumers and largely undifferentiated – and it is this complexity that has contributed to consumer’s reluctance to take out and engage in obtaining adequate levels of cover. An April 2016 survey by PwC found that, while 78% of Australians view life insurance as important, only 42% believed their life insurer would be there in their time of need.[iv] The industry has acknowledged this with the Financial Services Council acting to address this complexity in part by developing minimum medical definitions and advocating for simpler and clearer product documentation.[v]
Affordability and level of cover
Recently there has been considerable focus on the affordability of insurance in superannuation, and whether the cost will draw away funds which could be used to ensure adequacy of retirement benefits. This is a balancing act and trustees have a responsibility to consider the adequacy of insurance benefits for their members. The recent release of the Insurance in Super Code of Practice, will be a trigger for some funds to review insurance benefits. An important consideration is the balance between adequacy of benefits and affordability of premiums. Trustees have a challenging role in determining the default level of cover that it will provide to its members due to the differences in their members’ personal circumstances and insurance needs.
However, by considering fund demographics and average needs for Australians at different ages and across family types, this can give a good indication of member need. Most trustees will be reviewing their fund’s insurance cover in the light of the Insurance in Superannuation Code of Practice which includes a limit on the premium deductions from member accounts (1% of estimated level of salary), as well as a requirement to automatically cancel insurance cover in certain circumstances or when no contributions have been received for 13 months. [vi]
It is a difficult proposition to identify a single cause for the underinsurance issues we face in Australia. There are various cultural drivers, an inherently flawed over reliance on insurance within superannuation, coupled with the complexity of products that can point us to an answer. As a growing economy and nation, we as trusted advisers have a powerful role and moral obligation to work with our clients to better understand their needs and highlight gaps in their current strategy. We believe this approach will go a long way to changing perceptions about the value of investing in life insurance.
Kunaal Parbhoo holds a Bachelor of Business (Banking and Finance) with Honours from Monash University. He has also completed the Advanced Diploma in Financial Services. Kunaal commenced his financial services career in the 2006 Commonwealth Bank Graduate Program (Financial Planning), where he rose to become a financial adviser. He then transitioned to a boutique financial planning practice in Melbourne where he developed his specialist knowledge in risk management solutions. Kunaal joined Shadforth Financial Group in 2016. Kunaal is passionate about ensuring clients understand the risks faced by their financial situation or business and providing advice to help protect them. Away from work Kunaal is actively involved in his community and takes great pleasure in spending time with his family. Contact Kunaal at [email protected]
[i] Swiss Re Economic Research & Consulting, 2007
[ii] Rice Warner, Underinsurance in Australia 2017 report
[iii] Rice Warner, ‘Australia’s persistent life underinsurance gap’, 2015
[iv] PwC, ‘Future of life insurance in Australia’, 2017
[v] Financial Services Council, Life Insurance Code of Practice, 2017