What is underinsurance and why it matters in Australia

Imagine facing a crisis – a house fire, sudden illness, or the unexpected loss of a loved one – only to realise the insurance payout in your policy isn’t enough to cover the costs. This can be the reality for many Australians who have unknowingly underinsured themselves.

Underinsurance means not having enough cover to rebuild your home, replace your belongings, or provide financial security if the unexpected happens. It’s more common than you might think, leaving many Australians financially vulnerable when they need support the most. This is why it is important that when you apply for your insurance policy that you consider what it would actually cost you to replace your assets if you needed to make a claim. This way your insurance provider can offer a level of cover that can help protect you from the unexpected. 

According to the Real Struggle Report 2024, nearly 7 in 10 (69%) Australian households are experiencing financial stress. With money already tight for many, not having the right level of insurance cover can put even further strain on your family during an already difficult time. Financial pressure can lead to choosing a lower level of cover for yourself or your family due to a higher premium than you are prepared to pay, though does this outweigh the risk?

In this blog, we’ll break down what underinsurance is, why it happens, and how you can make sure you and your loved ones are financially protected.

What is underinsurance?

Underinsurance happens when the policy you have taken out, has a payout that is less that what you would need to cover your assets. This can happen across all types of insurance, from car to life to home insurance and beyond. 

How are Australians underinsured? 

Underinsurance in Australia is more common than many realise, and it often happens for avoidable reasons – such as guessing how much cover is needed without research or professional advice or failing to review policies regularly.

For some, underinsurance means having no insurance at all, but for many, it’s the false confidence of thinking they have enough cover – only to find out, when they need it most, that their level of insurance falls short of actual replacement costs.

Home and contents insurance 

Many Australian families assume their home and contents insurance policy is enough to rebuild, repair, or replace their home and possessions if disaster strikes. But life evolves – new furniture, upgraded appliances, home renovations, and soaring construction costs all mean that a policy once considered ‘adequate’ may no longer be enough.

For example, rising labour and materials costs have driven up home-rebuilding expenses, yet many homeowners fail to update their policies accordingly. The Insurance Council of Australia estimates that around 23% of households do not have home or contents insurance at all, leaving roughly 1.8 million households without any protection. It can be a good idea to review your policy after any significant changes or upgrades to your property.

Life insurance

Life insurance exists to provide financial security for your loved ones if you pass away or are diagnosed with a terminal illness. But for many Australians, their insured sum may be nowhere near enough to cover mortgage repayments, ongoing living costs, or their children’s education.

With 38% of Australians struggling to afford medical expenses and 69% facing financial stress, life insurance often takes a back seat. But this can leave families vulnerable in times of crisis. If your family’s main income earner passes away or becomes terminally ill without adequate cover, your family could face serious financial hardship.

Although many Australians rely on default life cover through their super, industry research highlights that it often isn’t enough to protect a typical household from their ongoing and future expenses. This cover gap can leave families financially vulnerable if the unexpected happens.

Other types of insurance

• Car insurance – Choosing minimal cover may save money upfront, but it could leave you unable to repair or replace your car after an accident. If you rely on your vehicle daily, ensuring adequate coverage is crucial for financial security.
• Total and permanent disability (TPD) insurance – TPD insurance provides essential financial support if you become permanently disabled and can no longer work. However, it's estimated that 1 million Australians are underinsured for Death and TPD, leaving many without the cover they need to meet their financial obligations if they can no longer earn an income.
• Income protection insurance – If sickness or injury prevents you from working, income protection insurance can help relieve financial pressures while you get back on your feet. However, 3.4 million Australians are underinsured for income protection, meaning they may struggle to meet everyday expenses during recovery or be left without financial support when they need it most.

How much insurance do you need? 

Many Australians don’t know how much insurance cover they actually need. In short, the right amount varies based on personal circumstances, such as income, debt, family dependents, and living costs. While there’s no one-size-fits-all answer, here are general guidelines to consider. 

¹ https://moneysmart.gov.au/how-life-insurance-works/life-cover

² https://moneysmart.gov.au/how-life-insurance-works/total-and-permanent-disability-tpd-insurance

³ https://moneysmart.gov.au/home-insurance/contents-insurance

If you're unsure how much insurance you need, using online calculators or seeking advice from a financial expert can help you tailor coverage to your specific situation.

What are the risks of being underinsured?

The risk of underinsurance might not feel like a pressing issue – until you encounter the unexpected. From financial hardship to economic strain, the consequences can be severe.

Financial hardship and debt

Imagine losing your home in a fire, only to find out your insurance payout doesn’t cover the rebuild – what happens next? If you’re underinsured, you may be forced to drain your savings, take on high levels of debt, or even sell off assets just to stay afloat.

Wider economic consequences

Underinsurance affects entire communities, not just individuals. When disasters like bushfires or floods hit, thousands of underinsured homes could mean massive financial losses, lower property values, and struggling local businesses.

And it’s not just homeowners who suffer – the government ends up footing the bill, pouring millions into welfare payments, public healthcare, and disaster relief. This means taxpayers may ultimately pay the price for inadequate coverage.

Impact on family and dependents

For families, the stakes are even higher. If a main income earner passes away or becomes permanently disabled, loved ones could struggle with mortgage payments, living costs, or education expenses.

With 69% of Australian households already under financial stress, an unexpected loss can impact their financial security overnight. Without enough cover, families may be forced to downsize, take on debt, or make heartbreaking sacrifices just to get by.

How to prevent underinsurance

Underinsurance is avoidable with the right planning. Here’s are some factors you can consider to protect yourself and your family with the right level of cover.

1. Regularly review your insurance needs

Life changes quickly – whether it’s moving house, renovating, or starting a family. Regularly updating your insurance policies ensures your coverage keeps pace with your needs. Many Australians underestimate the cost of rebuilding their homes or replacing belongings, leaving them vulnerable to financial shortfalls after a disaster. A simple policy review each year could help ensure you stay protected.

2. Understand what your policy covers

Not all insurance policies are created equal. Carefully reading the product disclosure statement (PDS) of each insurer you’re considering helps you understand exactly what is and isn’t covered so you can select the right policy for your situation.

Some policies may include extra benefits like temporary accommodation or accidental damage, while others may have exclusions that leave you underinsured. Knowing these details ensures you have the right level of protection for your needs.

3. Budget for insurance costs

With the rising cost of living, it can be tempting to cut back on insurance to save money. However, reducing your cover could leave you financially exposed if the unexpected happens. Instead, factor your insurance premiums into your household budget as a non-negotiable expense – just like rent or mortgage payments.

Consider bundling multiple policies with one provider, increasing your excess, or taking advantage of discounts for annual payments. Treating insurance as an investment in your financial security can give you peace of mind in the long run.

Frequently asked questions

How do I know if I’m underinsured?

If you haven't reviewed or updated your insurance policy in several years, you might not be as protected as you think.

Common signs of underinsurance could include assuming default life insurance through super is enough, estimating your coverage instead of calculating it, not factoring in rising costs, or forgetting to update your policy after major life changes. 

If you're unsure, comparing your policy's coverage to an updated estimate of your needs can help you feel more confident about your level of protection.

What happens if I need to make a claim and I’m underinsured?

Dealing with a claim can already be stressful, and finding out that your payout isn't enough to cover the costs can make it even more overwhelming. If your insurance falls short, you may have to dip into savings, take out loans or make financial sacrifices. Some insurers allow mid-term adjustments, but not all policies offer this flexibility. Checking your coverage now can help you avoid financial strain when it matters most.

Can I increase my insurance cover at any time?

Yes – most insurers allow you to update your cover whenever your circumstances change. If you've recently moved, renovated your home, or had a significant life event like starting a family, it's a good idea to check if your current policy still meets your needs. Taking a proactive approach means you can feel secure knowing you and your family are protected against the unexpected.

Ensure you’re covered for the unexpected

Life is full of uncertainties, but having the right insurance in place means you don’t have to face them alone. Underinsurance can create financial and emotional burdens, but by regularly reviewing your cover, you can stay prepared for whatever comes your way.

Keep Reading: It’s time you made sure your insurance is up to date – when was the last time you checked your home insurance? 

If you’re looking for peace of mind and financial security for you and your loved ones, Real Insurance offers award-winning products, such as life insurance designed to provide real savings and value. Find out more or request a quick quote online now.