Understanding the implications of underinsurance

Taking out less cover than you need might help you save on premiums, but it can end up costing you and your family in the long term. Underinsurance is a major problem for Australian households, and you might not even be aware you have insufficient cover. The effects of underinsurance can be far-reaching and could lead to significant hardship for yourself and your loved ones, so you’ll want to learn about the risks of underinsurance and find out how to avoid them.

What is underinsurance?

Underinsurance is when you don’t have insurance or when you have coverage but it’s insufficient for your needs. If you don’t have insurance and something unexpected happens, you would need to finance the loss yourself.

If you do have insurance with insufficient coverage and need to make a claim – whether it’s car, house, life, or some other type of insurance – the amount you need to claim is more than the amount you’re eligible for. If this occurs you will have to cover your own costs of rectifying the issue or you’ll need to finance the loss (or the gap in cover) yourself. While underinsurance means you may pay less on premiums than if cover was adequate, the resulting difference in how much you can claim could exceed what you’ve saved on premiums.

How are Australians underinsured?

Whether it’s health, car, life, income, pet, or some other type of insurance, it’s possible you don’t have cover at all or your current policies are inadequate for your needs. We’re exposed to risk in all areas of life: driving on the road, health and lifestyle factors, economic uncertainty, and when travelling overseas. Insurance can be a great way to minimise exposure to risk, but we don’t always get it right.


The Family Protection Survey recently found 38 per cent of Australian families don’t have life insurance, despite 91.3 per cent of Aussie parents agreeing life insurance cover can ease the burden of a worried mind.

Nearly a quarter of Aussies were not confident that the insurance they have would be enough, and only one in three were content they had enough life insurance cover. 35 per cent of those surveyed said if they died, their families would suffer hardship. A typical young family could require approximately $680,000 of life insurance, but the median level of cover is about $258,000.

Life cover

Research shows the median level of life cover for Australians provides for only 61 per cent of basic needs and 37 per cent income replacement level. A large proportion of Australians rely on the life cover provided through super, however; the default level provided through super may not meet the needs of typical Aussie families. 

Other types of cover

Aussies are also underinsured in other areas:

  • Total and permanent disability – Median level of total and permanent disability cover meets just 13 per cent of needs. 
  • Home and contents insurance – The average level of home contents underinsurance is $40,300.

Implications of underinsurance

Underinsurance can have wide-ranging impacts, including creating financial hardship and challenges in the event your payout is not sufficient for your needs. For example, if your home was damaged by flood or fire, you could find you have inadequate funds to replace your furniture and contents.

Financial hardship can affect family members, too. Whether it’s your partner, your children, or your extended family members, the people you’re responsible for can end up being adversely impacted if you struggle financially.

Underinsurance can also lead to a wider social and economic cost, forcing the government to cover expenses through provision of welfare payments and providinge more services with taxpayer money. Some estimates suggest life underinsurance alone costs the Australian government $57 million a year

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How to prevent underinsurance

Prevent underinsurance by regularly reviewing your financial circumstances and the insurance cover you need to protect for assets and to support your broader financial plans. Talk to your adviser, if you have one. 

  • Get informed – Read your product disclosure statements carefully and understand what your policy covers and does not cover. Talk to your insurer if there is anything you don’t understand.
  • Focus on needs and replacement costs – Remember, it is about what you would need to have to replace items, maintain current living standards, and cover ongoing financial obligations in case something unexpected happens. Life, and total and permanent disability are some of the key insurance types you may consider reassessing. However, don’t forget about other areas where insurance could be important such as your car, home, pet, funeral, and travel insurance.
  • Update – Your family’s insurance needs will change as your composition changes, so adjust and update regularly. With each addition to your family or lifestyle change, get in touch with your insurer to make sure your insurance cover is adequate.
  • Budget – Budget for your insurance premiums as you would with any household expense. 
  • Realise risk is part of life – We’d prefer not to think about it, but assessing potential risks is the best way to be prepared for unexpected events in life.

Ensure you’re covered for the unexpected

Underinsurance is a significant concern for Australian households, and the impact in event of a claim can be considerable on you and your family. By recognising you may need to review what level of cover you have against what you may need, you can better prepare for unexpected events and protect yourself and your loved ones.

Real Insurance offers  award-winning insurance products that can deliver real savings and value, so contact us today to find out more about our life insurance and other types of insurance. Alternatively, you can request a quick quote online now.

This article is an opinion only, provided for general information purposes and shouldn’t be considered or relied upon as professional or personal advice. If you have legal, tax, or financial questions, you should contact an appropriate professional.