Major life events that lead to death, disability or trauma have the potential to transform your family’s life. The decisions you or another family member make (or choose not to make) about the adequacy of your insurance, are those sliding door moments, that could be the difference between your family staying afloat or sinking.
It’s estimated that 60–80% of Australians are underinsured for life insurance, total and permanent disability (TPD) insurance, or trauma (critical illness) cover. They often assume that their default cover through superannuation is sufficient, when in reality it may fall well short of their actual needs.
That’s leading to as much as $25 billion in missed claims each year. Not just a statistic — it’s the difference between stability and financial distress for thousands of families.
The underinsurance gap is most acute for middle-income earners. Families with mortgages, children, and reliance on dual incomes — are most at risk of financial derailment.
Why Is underinsurance happening?
There are several reasons why underinsurance is so widespread:
- Many people simply assume their default cover through superannuation is “enough”, but default superannuation insurance often falls short. Median default cover of superannuation funds meets approximately 65- 70% of basic level death cover needs for average households but the proportion is must lower for families with children.
- Regulatory Changes: Policy changes, such as the cessation of automatic insurance cover for new superannuation accounts for individuals under 25 or with low balances, have contributed to a rise in underinsurance.
- Cost of living pressures are prompting people to cancel or reduce cover, even though the financial impact of an unplanned health event could be far greater than the premium cost.
- Complexity of Products: The complexity and variety of insurance products can be overwhelming, leading to decision paralysis or inappropriate coverage choices.
- Fewer financial advisers now specialise in life insurance advice, which reduces access to tailored guidance.
A Family-wide Perspective on Insurance Cover
Even if you have the resources to “self-insure”, it is worth asking whether your adult children and other close family members hold sufficient insurance. Should they suffer a serious illness, disability or untimely death, you may feel obliged to step in financially, placing unexpected pressure on your own retirement capital. Making sure the wider family unit is properly protected therefore preserves both their security and your lifestyle plans.
Understanding the Different Types of Cover
There are several types of personal and business insurance designed to protect you, your family, and your business if the unexpected happens. Here’s a quick overview of the main types:
Life Insurance
Pays a lump sum to your beneficiaries if you pass away or are diagnosed with a terminal illness. It can help provide financial security for your loved ones by covering debts, ongoing living expenses, or future goals.
Total and Permanent Disability (TPD) Insurance
Provides a lump sum if you become permanently unable to work due to illness or injury. It can help fund medical care, living expenses, and any necessary lifestyle adjustments.
Trauma Insurance (Critical Illness)
Pays a lump sum if you’re diagnosed with a specified serious medical condition — such as cancer, heart attack, or stroke. This can help with treatment costs, time off work, or reducing financial stress during recovery.
Income Protection Insurance
Replaces a portion of your income (usually up to 70%) if you’re unable to work due to illness or injury. It helps maintain your lifestyle and cover everyday expenses while you recover.
Business Expenses Insurance
Covers fixed business costs — such as rent, utilities, and staff wages — if you can’t work due to illness or injury. This ensures your business can keep operating while you focus on your health.
Key Person Insurance (Revenue or Capital Purpose)
Protects a business against the financial impact of losing a key person due to death or, disability, or illness.
- Revenue purpose: Helps replace lost income or profits tied to the key person’s role.
- Capital purpose: Helps repay debts or fund ownership restructuring if the key person is no longer there.
Buy-Sell Insurance
Supports business succession planning by funding the buyout of a departing owner’s share (due to death or disability), ensuring a smooth transition and fair value for all parties.
Where are the Insurance Coverage Gaps?
Here is a quick overview of the situations where underinsurance maybe happening due to common misunderstandings versus reality, and how that can impact if you are underinsured.
Covering Debt Isn’t Always Enough
Many people structure their insurance to cover outstanding debts like a mortgage but overlook the broader financial impact of serious illness or death. Without sufficient cover for ongoing living costs, potential medical expenses, and lifestyle modifications, families can be left financially exposed at a difficult time.
Income Protection Payout Periods Can Be Too Short
People assume their income protection will cover them until retirement if needed. Many policies (especially those within super) have short payment periods, sometimes only up to 2 years.
TPD Definition Too Narrow
People believe “Total and Permanent Disability” means they can’t work anymore. Many policies define TPD as being unable to work in any occupation, not just your own.
Trauma Insurance Doesn’t Cover All Critical Illnesses
People believe trauma insurance covers “any” serious illness. Trauma insurance only covers specific conditions like cancer, heart attack, stroke—based on strict medical definitions.
Mental Health Exclusions
Mental health conditions are now more widely recognised and understood, with many people expecting them to be covered in the same way as physical illnesses. Many policies (especially older or group policies) exclude mental illness or restrict payouts for psychological claims. Mental health-related claims are increasingly common.
Non-Disclosure and Medical History Issues
People fail to disclose pre-existing medical conditions or lifestyle factors (like smoking or dangerous hobbies) thinking it’s not important. Insurance is a contract of utmost good faith. Claims can be declined on technicalities, even if the non-disclosed condition isn’t related to the claim.
Business Owners Missing Key Cover
Business owners often assume their personal insurance covers business continuity. Business owners need Buy/Sell Agreements, Key Person Insurance, or Business Expense Insurance—which are separate. The business may collapse or be sold under duress if the owner or a key employee dies or becomes disabled.
Inflation Isn’t Always Accounted for, and Cover Can Reduce with Age
People often set their cover amount and never review it. Some insurers will increase your cover each year to keep up with rising costs, while others keep it the same or even reduce it as you age. An originally adequate policy may be woefully insufficient when claimed.
When to Review Your Cover
If this article hasn’t already motivated you to evaluate your insurance coverage, certain life events make it crucial to reassess your policies.
| Event | Why It Matters |
| Births, deaths, marriages | Your family situation changes — you may need to increase or reallocate cover. |
| Buying or selling a property | Your financial exposure or net wealth has changed, affecting the amount of cover needed. |
| New Debt | Your financial obligations increase, raising the amount of capital at risk. |
| Health Changes | Medical history affects underwriting — acting early can lock in better terms. |
| Starting or changing jobs | Your employment benefits (e.g. employer insurance) or income level may change. |
| Starting a family or having more children | More dependents means greater future financial responsibilities. |
| Children finishing school or becoming financially independent | May reduce the amount of cover needed. |
| Receiving an inheritance or financial windfall | You may be able to self-insure to a greater degree or rebalance your cover. |
| Approaching retirement | You may no longer need income protection, but may need estate planning or aged care considerations. |
| Major changes in superannuation | Policy terms and default cover can change due to legislation or fund updates. |
| Insurance policy changes or premium hikes | Stepped premiums can become unaffordable over time, requiring adjustments. |
| Divorce or separation | You may need to update beneficiaries and reassess your financial obligations. |
| Taking extended leave (e.g. parental or sabbatical) | Your ability to earn income and maintain contributions can be affected. |
| Changes in tax laws or insurance regulations | May affect deductibility or structure of insurance ownership (inside vs outside super). |
| Business changes (new partner, partner exit, increased profits) | Update any buy/sell agreements or key person insurance to match new valuations. |
How We Help You Work Out the Right Level of Insurance Cover
With so many Australians underinsured, it’s natural to wonder how much cover is enough for you and your family. Everyone’s needs are different, which is why we work with you to determine an appropriate level of insurance using a personalised framework that considers the following:
- Your Future Earning Potential
We help you assess your long-term income potential — including your career path and expected salary growth — to protect the value of your future earnings. - Your Debts and Financial Commitments
We consider any outstanding debts such as your mortgage, business loans, or personal guarantees, to ensure these can be repaid or serviced if something happens to you. - Your Lifestyle and Ongoing Expenses
We take into account the day-to-day costs of maintaining your lifestyle and supporting your family, including schooling and general household needs. - Future Financial Goals
Whether it’s supporting your children’s education or other major milestones, we make sure your cover aligns with what matters most to you. - What You Already Have in Place
We review your existing resources — such as superannuation, savings, and any default cover through your employer — so you’re not paying for cover you may not need. - Structuring and Tax Efficiency
We help structure your cover in the most tax-effective way, whether held personally or through superannuation, so your benefits go where they’re needed most.
In addition to the above, we also consider important factors that are often overlooked — such as potential medical expenses, the cost of modifying your home if required, and any other specific concerns that are unique to your circumstances.
We are here to help
We can make sure you have the right protection in place by:
- Helping you understand your options – explaining how different types of insurance work and why they matter for your financial security.
- Assessing your needs – looking at your personal situation to recommend the right level of cover for you and your family.
- Making it easier to choose – cutting through the complexity so you can make confident, informed decisions.
- Keeping your protection aligned with your life – reviewing your cover regularly to make sure it still suits your needs as life changes.
Unsure whether you—or your children—are adequately covered?
Contact our advice team at wealth@peopleandpartners.com.au or (02) 9063 4500 for a complimentary insurance discussion. We’ll help you identify any gaps and structure cost-effective cover that safeguards the whole family’s wealth.
Disclaimer
People & Partners Wealth Management Pty Ltd ABN 67 127 250 613 is a corporate authorised representative of Fortnum Private Wealth Ltd ABN 54 139 889 535, holder of Australian Financial Services Licence (AFSL) No. 357 306. The content of this article is for general informational purposes only and does not constitute personal financial advice. It does not take into account your individual objectives, financial situation, or needs. Any advice we provide will be detailed in a formal advice document. The opinions expressed in this article are those of the authors at the time of writing and should not be taken as a recommendation to act. To the extent permitted by law, Fortnum Private Wealth Ltd and its associates accept no liability for any loss or damage incurred as a result of reliance on this communication.
