One in three Australians has no disability insurance, pushing the level of underinsurance to $304 billion per annum, according to a new study commissioned by the Financial Services Council.
The project was undertaken for the FSC by KPMG, and looks at the level of under-insurance in Australia in respect of employed people aged 18-64. It also measured the consequential impacts on social security benefits.
Of the roughly 9.5 million Australians who require some kind of disability insurance to protect their income, the report asserted that almost all are considered under-insured. On average, just 27% of disability insurance needs are being met through existing cover. 35% of Australians have no form of disability insurance.
Baby Boomers were found to be the most under-insured Australians, with those aged 45-64 having an insurance shortfall of 77% of disability insurance needs. Baby Boomer women have the highest levels of under-insurance with a gap of 83% of their total insurance needs. Men have a gap of 74%. All other age groups have approximately 55% of the level of adequate insurance.
For the purposes of its report, KPMG deemed an appropriate level of insurance as being sufficient to provide for the family’s needs until the children become adults, factoring in the continued income of the healthy partner who would return/continue to work. According to KPMG, a typical employed person requires insurance of 84% of income until retirement in the event of disability. This represents income replacement of 75% and a further 9% of income to replace lost superannuation.
The FSC said under-insurance represented a significant cost to the Australian economy. Annual assistance to disabled persons and related services was estimated by the Australian Treasury to be $24 billion in 2012-2013, of which $14.8 billion related to the actual disability support pension. According to the KPMG research, if all Australians had adequate disability insurance, the Government could save $340 million annually. In the tenth year this would equate to annual savings of $2.5 billion.
“There is an opportunity for the government to share the financial risk and budget expense associated with acquired disabilities to the private insurance sector under the right policy settings,” said FSC CEO, John Brogden.
He added that a higher take up of private disability insurance would reduce pressure on public finances and will be likely to deliver a higher standard of living for disabled Australians.
The FSC is calling on the Government to actively encourage Australians to take out disability cover.