Naivety drives under-insurace gap

Watching one of my favourite shows the other day, Air Crash Investigations I found it very interesting to listen to the survivors talking about what their final thoughts were as champion pilot Chesley ‘Sully’ Sullenberger attempted to turn his plane into the Hudson river.

One of the first questions the interviewer asked the spokesperson of the survivors group was “what was going through your mind as the plane started ditching into the Hudson?” He exclaimed that his first thought was “did I have enough life cover for my wife and kids?”

My first thought was, well I bet he has enough cover now.

Disturbing chronic ignorance

Reading a report compiled by life insurance company Lifebroker and Sweeney Research highlighted just how much of an afterthought people view personal wealth protection strategies such as life/trauma/total and permanent disablement and income protection policies and just how vital they really are as part of an overall financial plan.

Put simply you won’t reach any of your financial goals without them in place.

More than two thirds of those surveyed (71%) believed the Government will come to their rescue if they become sick or injured or die prematurely regardless of whether they were working or not, and that they (the Government) were mandated by law to do so.

Ignorance squared

The majority of respondents form the survey also believed that an income protection policy covered their income if they lost their job or quit. Hmm, what a great idea that would be? Maybe could get Julia Gillard to tie that in with her fantastic new ‘Fair Work” IR scheme somehow.

Maybe we could get the Government to set up a scheme such as an income protection policy underpinned by the Government. Oh, wait, sorry, that’s right we already have such a scheme, it’s called the dole!

Before I get any more cynical and facetious, these sort of misconceptions are continuing to drive a massive underinsurance gap in Australia and remember, that while some insurance companies are less than forthright (more so in the past) most, well all life companies are in the business of paying legitimate claims or they just wouldn’t survive.

There are generally more fraudulent claims made by policy holders than life companies trying to magically manufacture loop-holes to avoid paying them.

It’s amazing that people will think nothing of insuring their home, health, car and contents and turn around and give absolutely no thought to insuring their biggest asset. Your ability to earn an income.

Sorry, it’s just not enough

Most people from the survey mistakenly believed that they were automatically covered for and held enough life cover under their super fund policy and most people also vastly overestimated the cost of life insurance.

For an average ballpark guide most people (employees) would need in the order of $700–$900,000 depending on a number of factors such as debt, replacing income, spouse, etc. For SMEs and entrepreneurs your worth holds greater value based your business acumen and achievements and that figure would be something more like the $2-3 million mark.

Just a few weeks back I took care of some cover for a young professional SME couple just past their mid-30s. $1 million of cover for life and total and permanent disablement each under their self-managed super fund cost them around $100 per month, combined.

When you compare it to house, contents, car, health insurance premiums, etc – that’s cheap.

The vibe

The survey results highlighted Australians attitudes in general to insurance and the fact that they are more than likely to obtain cover if they realise there is a risk that exists that needs to be protected.

What is the perception out there? Are we really that naive about personal wealth protection policies? Why is there such a perceived lack of understanding of these policies? Did you know they exist? Let me know?

For next week’s blog I will combine this week’s blog with another survey result I found, and I’ll show you how to save some money on your next trip to see your adviser.

Nick Christian is a Financial Adviser and planner and authorised representative of Millennium3 Financial Services.

The views and opinions expressed within this letter are those of the author and do not necessarily reflect those of Millennium3 Financial Services Pty Ltd.

The above is general in nature and should not be acted upon without seeking the advice of a professional licensed financial planner.