When creating a financial plan, it’s common to overlook the potential impact of unforeseen life events that could disrupt your financial goals. This tendency is widespread because individuals often overestimate their invulnerability, believing that unexpected life events won’t affect them. Factors like perceived costs, procrastination, trust issues, and complexity further contribute to underinsurance in Australia.

According to the FSC Underinsurance Report 2022, these numbers illustrate this:

• An estimated 1 million Australians are underinsured for Death & TPD.
• Approximately 3.4 million Australians are underinsured for Income events.

Let’s explore the various types of insurance that are crucial components of your financial plan and understand how being underinsured in any of them can have detrimental consequences:

Income Protection Insurance

Income Protection insurance provides a regular income stream to the insured individual if they are unable to work due to illness or injury, helping to replace lost income during the period of incapacity and recovery. Being underinsured in this area can hinder the achievement of your financial goals. Your income assists in paying off your mortgage, building your investment portfolio, or contributing to your retirement savings.

Life Insurance

Life insurance provides a designated beneficiary with a specified amount of money upon the insured person’s death. This is the most common and well-known form of insurance in Australia. Consider a scenario where being underinsured could cause a roadblock in your financial plan: if the main income earner passes away, the surviving partner might be left with debt they cannot service, potentially leading to the sale of assets. This can disrupt an individual’s estate planning wishes and cause unnecessary stress for surviving beneficiaries.

Total and Permanent Disability (TPD) Insurance

TPD offers financial protection by providing a lump-sum payment if the insured person becomes totally and permanently disabled due to a severe injury or illness. Underinsurance in this area could result in having to sell assets to fund medical expenses or home modifications.

Trauma Insurance

Trauma insurance, also known as critical illness insurance, provides a lump-sum payment if the insured person is diagnosed with a specific serious illness or injury listed in the policy. This helps alleviate financial burdens during their recovery and treatment. Being underinsured here could result in not being able to meet mortgage repayments during the recovery period.

In conclusion, these insurance coverages play a critical role in financial planning, and being underinsured in any of them can have detrimental consequences. Unexpected life events do happen, so it’s crucial to assess the potential negative impacts they could have on your financial plans.