The Underinsurance Gap: Why Wealth Doesn't Always Mean Adequate Cover

The Underinsurance Gap: Why Wealth Doesn't Always Mean Adequate Cover

Underinsurance is usually discussed as a mainstream financial wellbeing issue - the gap between what every day Australian households have and what they'd actually need if a breadwinner died or was unable to work. But the same gap shows up, often just as starkly, among business owners, professionals, and multi-generational families, and ironically, the more complex a family's finances become, the easier it is for that gap to go unnoticed.

Why the gap persists at higher wealth levels 

Default insurance through superannuation is built around broad assumptions, a standard multiple of salary, a generic definition of income, a one-size-fits-all benefit period. For an executive, business owner, or professional with income drawn from multiple sources, equity in a business, or family trust distributions, those default settings can understate real financial exposure by a wide margin.

The ATO will therefore withdraw TD 2022/11, which expressed the contrary view, and review its other published guidance.

• Income isn't always “salary.” Default super cover is often calculated against base salary or a simple multiple of it. Business owners drawing dividends, trust distributions, or irregular income may find default formulas don't reflect what their household actually relies on.

• Business value isn't automatically protected. A family business built over decades can represent the bulk of a family's net worth, yet be entirely uninsured against the death, illness, or incapacity of a key person, a different category of cover to personal life insurance.

• Lifestyle and legacy goals raise the bar. The amount of cover needed to maintain a family's lifestyle, fund children's education, or protect intergenerational wealth transfer plans is typically far higher than the default settings built for a general working population.

• Complexity delays action. Families with multiple entities, trusts, and advisers can assume “someone” has this covered, when in practice, personal risk insurance often falls between the cracks of estate planning, business structuring, and financial advice conversations.

What this looks like in practice

Consider a family business principal in their late 40s with default cover through an industry super fund. The default sum insured might be calculated as a modest multiple of base salary, nowhere near enough to cover a business succession event, ongoing family lifestyle needs, and outstanding debt if that person died or became permanently unable to work. Multiply that shortfall across a family with multiple income earners, business interests, and long-term wealth transfer goals, and the gap between “some cover exists” and “the family's financial position is genuinely protected” can be substantial.

This is not a hypothetical. Broader research into underinsurance across the Australian population consistently finds that even where cover exists, median sums insured fall well short of the income replacement needed to maintain a household's position, and that gap is a matter of degree, not something that disappears at higher wealth levels.

Closing the gap starts with a proper needs analysis

The starting point isn't necessarily “more insurance” - it's an accurate picture of what would actually be needed to protect a family's position, business continuity, and long-term goals if the unexpected happened. That means looking beyond default super settings to consider:

• Income replacement needs based on actual household income and lifestyle, not a standard formula

• Business succession and key person protection, separate from personal life cover

• How personal insurance interacts with estate planning, trust structures, and business agreements (such as buy-sell arrangements)

• Whether cover held through superannuation is fit for purpose, or better held outside it