Contact us. Hoa Bui T: + 61 (02) E: hbui@kpmg.com.au. Briallen Cummings T: + 61 (02) E: bcummings01@kpmg.com.au.

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1 Contact us Hoa Bui T: + 61 (02) E: hbui@kpmg.com.au Briallen Cummings T: + 61 (02) E: bcummings01@kpmg.com.au No reliance This report should not be regarded as suitable for use by any person or persons other than the Financial Services Council. No party, other than Financial Services Council, may rely on the attached report. If you are a party other than the Financial Services Council, KPMG Actuarial Pty Ltd: owes you no duty (whether in contract or in tort or under statute or otherwise) with respect to or in connection with this report or any part thereof; will have no liability to you for any loss or damage suffered or costs incurred by you or any other person arising out of or in connection with the provision to you of this report or any part thereof, however the loss or damage is caused, including, but not limited to, as a result of negligence. If you wish to rely upon this report or any part thereof you will do so entirely at your own risk KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International. Liability limited by a scheme July 2013

2 INSURANCES Underinsurance Death Protection Gap in Australia kpmg.com.au

3 Contents 01 Introduction 1 02 Data Sources 5 03 Insurance Death Cover 7 04 Impact of Underinsurance on Social Security Benefits Death 19 This report has been prepared by KPMG Actuarial Pty Ltd Australian Financial Services Licence No The information in this report has been sourced from, or based on information sourced from, a range of publicly available sources and data provided to KPMG by insurance companies for the purpose of conducting retail experience investigations and writing this report. We have relied upon and assumed, without independent verification, the accuracy and reliability of that information. This report has been prepared to provide general information only and does not take into account the objectives, financial situation or needs of any specific party. It is not intended to take the place of professional advice and readers of this report should not make specific insurance-related or other decisions in reliance on the information contained in this report. Before acting or relying on any information, readers of this report should consider whether it is appropriate for their circumstances having regard to their objectives, financial situation or needs. KPMG Actuarial Pty Ltd and KPMG disclaim all responsibility and liability for any loss or damage suffered or costs incurred as a result of anything done or omitted to be done by any party in reliance, whether wholly or partially, on this report or any part thereof, however the loss or damage is caused.

4 19% of families do not have any death insurance Australians aged are the most underinsured for death Executive Summary KPMG has undertaken a research project to measure the level of underinsurance in Australia in respect of the lives of employed people aged 18 to 64 and the consequential impacts on social security benefits. The level of underinsurance of the lives of employed people in Australian families is estimated to be $800 billion in respect of insurance against premature death. This is still a significant level of underinsurance. In determining the level of underinsurance, allowance was made for existing insurance, the level of assets in superannuation and other assets held by individuals. Underinsurance is measured against an adequate level of insurance designed to cover basic needs such as outstanding mortgage balances as well as ensuring that standards of living are broadly unchanged following the death or disability of an income earner. The typical person with dependent children and a partner requires insurance of $570,000 in the event of death. Our analysis of the population and the insured coverage suggests that 19% of families do not have any death insurance. Underinsurance levels vary significantly by age group, gender and geographical location. Australians in the age group of are the most underinsured for death (48% underinsured). The cost of underinsurance is significant to Australia. If Australians were adequately insured, social security benefits could be reduced by $29 million after taking foregone tax revenue into account.

5 Introduction Background Approach The Financial Services Council ( FSC ) engaged KPMG to conduct an investigation into the level of underinsurance of Australian lives. The scope of work was to: Collect detailed data from life insurance companies on insurance issued through industry funds and master trusts to supplement data already collected for individual policies and employer sponsored schemes; Estimate the level of underinsurance of lives in Australia by age, gender and geographical location; and Estimate the cost of underinsurance on the social security system. Estimating the Level of Underinsurance A three step process was required to estimate the level of underinsurance of Australian lives: Identify the component of Australia s population who have insurance needs; Estimate a desired level of insurance based on providing adequate insurance to meet the insurance needs; and Estimate the existing level of insurance by collecting insurance data written in industry fund and master trusts, and combining with data from the KPMG Group Life Survey and the FSC-KPMG experience investigations. In approaching this work we considered that there were two primary insurance needs related to individuals lives: Insurance against future financial income loss in the event of death; and Insurance against long-term future financial income loss in the event of disability. This report covers the needs for insurance against future financial income loss in the event of death. The needs for insurance in the event of disability is covered in a separate report.

6 1 Top Down Analysis In identifying the level of underinsurance we used population statistics (as published by the Australian Bureau of Statistics (ABS)) and industry insurance data (as published by the Australian Prudential regulation Authority (APRA)) to identify aggregate levels of desired insurance and aggregate levels of existing insurance. We have also used insurance data collected from insurers to provide the granularity required by the analysis. The advantage of a top down approach (as opposed to a bottom up approach) is that the result is more comprehensive. Estimating the Cost of Underinsurance Underinsurance has an adverse impact on Australia s social security system. On the death or disability of an income generating family member, an inadequately insured family has a significant reduction of family income and an increased likelihood of requiring assistance from the social security system. A two-step process was required to estimate the cost of underinsurance to the social security system: Estimate the social security benefit level after death based on the current level of insurance; and Estimate the social security benefit level after death based on the adequate level of insurance.

7 3 Underinsurance How much Insurance is Desirable? The determination of the level of insurance required by each person is unique to their particular circumstances. We have identified four levels of insurance, which are described below in the context of the death of an income generating family member: Basic insurance: This level of insurance is designed to cover basic needs such that upon the death the family is not forced to sell their home or belongings; Adequate insurance: This level of insurance is designed to cover the family s needs until the children become adult and if relevant provide ongoing rental support until the partner retires. The surviving partner is expected to continue to work (or return to work) and to use the deceased superannuation and other assets to supplement the family s future income; Comfortable insurance: This level of insurance is designed to ensure the family has no change in financial circumstances following the death. For example, it might ensure that a non-working parent is not obliged to return to the workforce; and Over insurance: This level of insurance is in excess of the needs created by the death. For the purpose of this report, we have measured underinsurance relative to an adequate level of insurance. We acknowledge that other definitions of underinsurance may also be reasonable depending on community expectations. What this means is that the level of underinsurance determined in this report is not the maximum level of underinsurance. Many individuals might choose to have higher insurance levels than those set out in this report if they were adequately informed.

8 Death Protection Gap in Australia 4 Average vs. Typical As a top down approach has been adopted, most of the analysis in this report is performed using aggregate data to approximate the sum of typical individual circumstances. The results will therefore approximate the level of underinsurance rather than reflect a true level of underinsurance. The average person in Australia (or the mean ) has a higher income, a higher level of assets and is likely to have higher existing levels of insurance than the typical person (or the median ). For this reason the analysis in this paper is conducted primarily based upon the typical person. Jack: Underinsured $150K Jill: Underinsured $100K Bob: Over insured: $600K It is important exclude over insurance where possible as insurance is not fungible. If a group of people has significantly higher insurance coverage than the desired levels, the excess coverage cannot be used by the group of people who has insurance coverage below the desired levels. This means that a consideration of aggregate underinsurance may understate the extent of the sum of individual underinsurance. This is illustrated in the following example where the population consists of 3 people, Bob, Jack and Jill. Jack is underinsured by $150,000, Jill (the typical person) is underinsured by $100,000, and Bob is over insured by $600,000. Jill, the typical person in this population is underinsured by $100,000, in aggregate a population reflecting the typical person is underinsured by $300,000. In contrast, the average person in this population is over-insured by $100,000 and an aggregate population reflecting the average view is over-insured by $300,000. The averaging of the over and underinsurance, indicates that the population is not underinsured on average. If over insurance is disregarded then the average person is under insured by $83,333 (or $250,000 in aggregate). Aggregates generated by: Typical view (reflecting Jill): Underinsured by $300K Average View: Underinsured by $250K (disregarding over insurance) The analysis has therefore been conducted using two approaches: Typical person (reflecting the median or 40th-60th percentile of the population). Average person (reflecting the mean); and In both approaches, the level of over insurance is estimated and excluded.

9 Data Sources Introduction Population Data The analysis required two types of data: Population data to estimate the desired level of insurance, based on insurance needs; and Industry insurance data to estimate the actual level of insurance. Population data was primarily obtained from the Australian Bureau of Statistics (ABS) based on the latest census (August 2011). In addition to the online reporting provided by the ABS, KPMG requested a bespoke data set from the ABS in order to obtain the required level of detail 1. This data was supplemented where necessary with data from other ABS surveys including: Household Wealth and Wealth Distribution, Australia, Household Income and Income Distribution, Australia, Wage and Salary Earner Statistics for Small Areas, : Government Benefits, Taxes and Household Income, ABS Bespoke Data contained data on employed people with dependents including housing ownership, mortgage payments, geographic location (capital city vs. other), couple vs. single and income band. 2 This is the most recent survey and was released 14 October This is the most recent survey and was released 30 August This is the most recent survey and was released 28 February This is the most recent report and was released 29 June 2012.

10 2 Industry Insurance Data The key data sources for the industry insurance data used in this report are: 1. Statistics from the Australian Prudential Regulatory Authority (APRA). As all life insurers in Australia have to be licensed by APRA, APRA s statistics measure the aggregate level of insurance provided in Australia. They are adjusted to be suitable for the analysis in this report. In aggregate, KPMG collected 84% of the industry s insurance data at a detailed level. In some instances, employers may offer life insurance cover to employees and self-insure the risk. Insurance cover of this nature has been excluded as it is not possible to accurately quantify. This includes any selfinsurance made through public sector superannuation funds. 2. The FSC-KPMG lump sum risk and disability income claims investigation. This is an ongoing, industry data collection in respect of individual policies, covering death, total and permanent disability and disability income insurance. This investigation covers 15 insurers data, out of a possible 19 insurers, including all the major insurance companies. The 2009 exposure data included total sums insured of just under $840 billion and 3.2 million lives. 3. KPMG group life survey There are 10 active contributors and covers approximately 2 million lives. This survey covers insurance through master trusts and employer sponsored schemes. 4. Industry fund and master trust data collected specifically for this report. Although insurance within superannuation has grown rapidly over the last decade, there is currently no comprehensive data collection in respect of the insurance provided within the industry funds. For the analysis in this report, KPMG obtained data from 6 large group risk insurers (including all top 4 insurers in this market). The data collected includes characteristics of the insurance such as the number of members, age, gender and sum insured size. 18% Death Cover Data 16% 66% Age/Gender Differentiated Other Detailed Data Missing

11 Insurance Death Cover Introduction In Section 1 we identified that one of the primary insurance needs was the need to insure lives against future financial income lost in the event of death. The insurance which we considered best met this need was death cover where the cover did not restrict the circumstances in which the lump sum benefit would be paid 1. This insurance is typically provided by life insurance companies. The level of underinsurance for death cover is analysed by the following characteristics: Adequate Insurance Superannuation Net Other Assets Actual Insurance Age group; Family status; and Insurance Gap Geographical location. The underinsurance gap is calculated as: Adequate level of insurance; less Superannuation assets; less Other assets net of liabilities; less Actual insurance cover held. 1 The only exception is that death due to suicide shortly after the policy commencement, which is a standard measure to prevent undue selection against the insurer.

12 3 Focus on Families We consider it reasonable that a community would wish to adequately protect the financial security of dependent children and partners. This report focuses on the potential underinsurance for this group of people. The individuals considered to fall into this group ( Families ) have the following characteristics: Aged between 18 and 64; Employed and earning an income over $200 per week; and Have dependent children and/or a partner living with them. This definition of Families is more restrictive than the census definition, as it requires that the adults in the family be employed. We recognise that some individuals who have insurance needs will not have been included and this may understate the level of adequate insurance required. Two examples of excluded groups of people are: Parents who live alone, but contribute financially towards children; and People who are temporarily unemployed. The charts opposite set out the proportion of the Australian population who are categorised as Families based on data from the last Australian census. Approximately 9.5 million Australians (44% of the population) are employed. Of those, 3.5 million people (37% of the population) need insurance as they have dependent children and a further 2.0 million people (21% of the population) need insurance as they have a partner. 44% Australian Population 19% 23% 10% 13% <18 >=65 Visitors 18-65, Unemployed or Not in the Labour Force 18-65, Employed Australian Employed Population 37% 21% 18-65, Employed Single with No Dependent Children 18-65, Employed Couple with No Dependent Children 18-65, Employed with Dependent Children 42%

13 9 Underinsurance Adequate Insurance Building Blocks of Insurance Needs Although the desired level of insurance for each person is unique to their particular circumstances and their own security needs, some needs are universal. In this report, we consider the following to form the basic building blocks of adequate insurance: Settlement of debt: We have limited this to the mortgage on the family home due to the availability of data; Income replacement for the needs of dependents: 10 x 75% of gross of tax income where dependents are present; Rent for non-home owners to mirror the repayment of the mortgage for Families who are not owneroccupiers. The amount has been set at annual rent until the income earner turns 65, when retirement provisions would apply. Where a dependent child is present, a minimum of 10 years of rent is paid to reflect the average duration until the child becomes an adult. Mortgage Income Approach The three building blocks were calculated using the following approach: Mortgage payment data was provided as part of the ABS Bespoke Data and we converted the mortgage payment to an outstanding mortgage amount; Income data was provided as part of the ABS Bespoke Data set. No further manipulation was required; Average rental payments for each income bracket can be obtained from the ABS Census. The relevant rental payment for each income bracket was allocated to the income bracket within the ABS Bespoke Data set. In calculating the level of insurance need for rent, allowance was made for interest income on the lump sum payment and indexation of the rental amounts. Rent

14 Death Protection Gap in Australia 10

15 11 Underinsurance Actual Insurance Type of Insurance In this report, actual insurance means comprehensive life insurance cover. It is possible to purchase insurance which pays a benefit only when the death occurs in limited circumstances. Some examples of limited cover include: Accidental death cover where a payment is only made where the death was due to an accident; and Workers compensation cover where a payment is only made where the death occurred within the workplace. This payment is typically limited to funeral costs. Due to the limited nature of these insurances, no allowance has been made for this coverage in our analysis. Data Aggregate Insurance Amount APRA provided KPMG with a more detailed breakdown of the APRA statistics in order to separately identify reinsured and direct insurance and to identify insurance from investment balances. A number of adjustments were made to the APRA data to ensure that it was suitable for our analysis. The largest adjustment related to individual insurance amount, and involves isolating the amount of death cover from trauma or total and permanent disability cover. Other adjustment is to add business written directly by reinsurers to the gross amount written by direct insurers. The relevant information is summarised in the table below 1. KPMG estimates that in total, Australians have $2.8 trillion of death insurance cover from a combination of individual, conventional and group policies. Insurance is typically obtained through group policies (57%) and individual policies (37%); conventional policies such as whole of life and endowment assurance policies are essentially savings vehicle. Table 1: Gross Insurance Amounts ($ Trillion) APRA Statistics (Excluding Reinsurers) Super Non- Super Total KPMG Estimate of Death Cover Individual Risk Conventional Group Risk Total APRA statistics 12 months to December Bespoke Data (excluding reinsurers)

16 Death Protection Gap in Australia 12 Detailed Insurance Data Insurance can be provided either within a superannuation environment (and potentially paid from superannuation monies) or externally to a superannuation environment. In this report, we have considered insurance purchased in either environment. Detailed insurance data was obtained from sources as set out in the chart opposite: Individual (i.e. not group) insurance data was available to KPMG from the FSC-KPMG lump sum annual investigations. This data covers approximately 90% of the individual insurance segment and was split by age and gender. Some employer sponsored schemes and master trust data was available to KPMG from the KPMG Group Life survey. The KPMG Group Life survey covers 75%-80% of the employer sponsored scheme market. KPMG conducted a special data collection for insurance in industry funds, master trusts and direct business for this purpose of this report. 6 major risk insurers contributed data for this purpose: AIA, CommInsure, MLC, TAL, OnePath and Hannover Life. These insurers include the top 4 insurers in group risk providing insurance to industry funds and master trusts. The data collected totalled $1.5 trillion sum insured and 9.5 million members. Overall, the data collected is estimated to be 84% of the aggregate industry; 78% of that data was differentiated by age and gender. Individual Insurance Data: FSC-KPMG Investigation Group Insurance 10% Missing Data MasterTrust Data provided by companies upon request combined with KPMG Group Life Survey data Superannuation Industry Fund Data provided by companies to KPMG upon request 15% Missing Data

17 13 Underinsurance Approach The detailed insurance data collected was grossed up to the $2.8 trillion aggregate insurance level. Insurance Held by Families The insurance data relates to death cover held by all people regardless of employment status and family status. Adjustments were therefore required to identify the actual insurance likely to be held by families. These adjustments were made by: Excluding insurance relating to individuals below the age of 18 or over the age of 64; Apportioning the remaining insurance between families (people with dependent children and couples) and non-families by considering: The proportion of the population who are within the families category for each age group and gender; and Allowing for a higher propensity for these individuals to have insurance cover compared to the general population. Insurance from Multiple Sources It is a well known fact that Australians have multiple superannuation accounts. There are 28 million superannuation accounts 2 for 9.5 million Australians who are employed. The analysis allowed for individuals having insurance from multiple sources based upon the following information: Anecdotal evidence from insurers regarding the frequency of people identifying existing insurance when they apply for new insurance; Superannuation Account Consolidation report 3 ; and The size and nature of the insurance segments: industry, master trust, employer sponsored schemes and individual. The provision of insurance through multiple sources means that it is the combined insurance amount which should be compared against an individual s desired level of insurance to determine if they are under or over-insured. As discussed in Section 1, insurance is not fungible: some individuals will have cover in excess of the adequate level specified in this report while other individuals will have cover below this level. Adjustments were made to allow for the actual insurance to be effectively capped at the adequate level specified in this report. The analysis further suggests that 19% of families do not have any insurance cover for death (12% people with dependents and 7% of couples) do not have any insurance cover for death. It is less well known that a significant proportion of people have insurance from multiple sources. A person can have multiple insurance covers through industry funds, individual policies and employer sponsored schemes; as well as more than one individual policy or belong to more than one industry fund. 22% 12% 7% 59% Insured People with Dependents Uninsured People with Dependents Insured Couples Uninsured Couples 2 Superannuation Account Consolidation, Research by The Financial Services Council and DST Global Solutions, dated February ibid.

18 Death Protection Gap in Australia 14 Assets To determine the insurance gap, we considered whether certain assets should be available to meet some of the insurance needs. There are three main forms of assets: 1. Superannuation; 2. The family home; and 3. Other assets such as investment property, bank deposits, etc We assume that certain assets should not be used to offset the insurance need: The family home, the contents of the family home and vehicles. We consider it reasonable to expect that these assets do not have to be sold upon the death of a family member. Assets are needed to pay off debts including debts on cars, credit cards and investment properties. Information on household assets and liabilities was obtained from the latest ABS Household Wealth and Wealth Distribution Survey DO001_ Household Wealth and Wealth Distribution, Australia,

19 15 Underinsurance Level of Underinsurance Aggregate The aggregate level of underinsurance for individuals within the families category is set out in the chart opposite. This analysis has been performed by aggregating a weighted level of underinsurance experienced by a typical or median group of individuals with relevant age and family status (couple vs. single) characteristics. Insights include: The typical person has insurance covering 68% of their adequate insurance level. At an aggregate level, this means that the level of underinsurance based upon the typical person is approximately $800 billion (or 32%) of the adequate insurance level of $2.5 trillion; The adequate insurance level is driven primarily from income replacement (56%) with mortgages for home owners (25%) and rent payments for tenants (19%) contributing the remainder. The aggregate insurance needs are met 11% by superannuation, 12% by other net assets and 45% by insurance. The chart below provides an alternate view of the result if the level of underinsurance is aggregated from the "average person rather than the typical person. The average person differs from the typical person in that the typical person reflects the median or 50th percentile person in the population whereas the average person reflects the mixture of high and low levels of income, wealth and insurance. Due to the skewed nature of income and wealth distributions in Australian society the average person has a higher level of income and wealth than the typical person. Insights include: The average person has a higher level of insurance need, which is mostly but not completely offset by higher levels of insurance. Consequently, the aggregate underinsurance level increased to $866 billion if it were based on the average person, $66 billion higher than if it was based on the typical person. Adequate Insurance Superannuation Net Other Assets Actual Insurance Insurance Gap Aggregate Insurance ($ Billion) 3,000 2,500 2,000 1,500 1, Average Typical Super Other assets Actual insurance Gap

20 Death Protection Gap in Australia 16 The Individual View The level of underinsurance is different between groups of people. The charts opposite illustrate the extent of the variance. Insights include: Couples with no dependents have a lower level of insurance need and a lower level of underinsurance than people with dependent children (the typical person is 15% underinsured compared to 31% for couples with children); The level of underinsurance is highest for the youngest age group (the typical year old is 48% underinsured compared with 31% for and year olds) as the youngest age group typically has a low level of actual insurance and low levels of accumulated assets; The level of underinsurance for single with dependents is 33% compared to couples with dependents where it is 31%; The level of underinsurance is higher for single mothers (33%) than for single fathers (28%) reflecting lower levels of actual insurance. The level of underinsurance is similar between capital cities and non-capital cities (32%). Adequate Insurance Level ($'000) Poportion of Adequate Insurance Level Couple Single Fathers Single Mothers Capital Non-Capital Couple No Dependent Person with Dependent Super Other assets Actual insurance Gap 100% 80% 60% 40% 20% 0% Couple Single Fathers Single Mothers Capital Non-Capital Couple No Dependent Person with Dependent Super Other assets Actual insurance Gap

21 17 Underinsurance Level of Underinsurance for a typical person in each State/ Territory The level of adequate insurance and actual insurance has been estimated by state allowing for different income, mortgage and rental profiles as well as differences in individual insurance by state. The results show that the typical person in the Northern Territory has the largest insurance gap ($330,000) as they hold only 46% of the insurance cover they need. The typical person in Queensland, by contrast, has the lowest insurance gap ($150,000) and has 64% of the insurance cover they need. Proportion of Adequate Insurance Level 100% 80% 60% 40% 20% 0% NSW VIC QLD WA SA TAS NT ACT State Underinsurance Gap ($K) by State in Australia Gap Actual insurance Other assets Super

22 Death Protection Gap in Australia 18

23 Impact of Underinsurance on Social Security Benefit Death High-Level Approach The effect of underinsurance on the social security system is estimated as the difference in the social security benefits given to a household with adequate insurance, and the social security benefits of the household with the current (inadequate) level of insurance. We have focused on families with dependents, as they are likely to be the group that is most impacted by the death of an income earner. In particular the significant social welfare benefits that would be payable after a death would be expected to vary depending upon the insurance held (due to means testing of the social security benefits). Type A: Employed with Dependents? Type B: 1 Employed with Dependents Five types of families with dependents were identified: Type A: Couple family with dependent children, both employed Type B: Couple family with dependent children, one employed Type C: Employed with Dependents Type C: Single family with dependent children, one employed Type D: Single family with dependent children, none employed Type E: Couple family with dependent children, none employed When a person dies, two things occur: the income level of the household reduces due to loss of the person s income, and the household changes from one type to another. For the purpose of this exercise, we have assumed that any lump sum insurance payment would first be used to pay off the mortgage, and the remaining money invested to produce income to supplement the household income. By modelling this transition, and comparing the estimated level of social security benefits received by households after the death with the current level of insurance and the desired level of insurance were in place, the impact on the level of social security benefits can be estimated. Type D: Not Employed with Dependents Type E: Not Employed with Dependents

24 5 The key steps in our approach are therefore: 1. Determine the disposable income of a household prior to death and then after death allowing for the impact of insurance. 2. Step 1 is performed for 2 scenarios 1 a) Type A to type C b) Type B to Type D 3. Determine the level of social security benefit corresponding to the income level (and household type) after the parent s death. 4. The impact of underinsurance on the social security system is estimated by considering the probability of death for each person and the estimated impact on the social security benefits in the event of that death. All of these estimates assume that there is no change in the employment status of the surviving spouse, otherwise, the actual impact is difficult to assess. Our modelling has not allowed for: Surviving partners who are not in the workforce, who may choose to go back to work resulting in a higher post-death income; or Surviving partners, who are in the workforce, may choose to reduce their working hours to reflect their sole carer status resulting in a lower post-death income. Type A: Employed with Dependents? Type B: 1 Employed with Dependents Type C: Employed with Dependents Type D: Not Employed with Dependents 1 For type C we have not attempted to model the likely social security benefits after the death of the parent because it will depend significantly upon where the children subsequently live (other parent, another family, other person or adopted). We do recognise that by ignoring these, our estimate of the social security burden is conservative (i.e on the low side). For Type B moving to Type D (death of non-employed person), Type E moving to Type D and Type D we have not modelled likely social security impacts as the death is of an unemployed person, for whom insurance is considered unaffordable.

25 21 Underinsurance Social Security Benefit Data The Australian Bureau of statistics publishes the level of social security benefits received by different household types and by income levels. The three relevant distributions are shown opposite graphically for Type A, Type B and Type C households for The graphs show the distribution of disposable income of households by quintile 2, and the level of social assistance that the households receive in cash on average. Disposable Income ($pa) 250, , , ,000 50,000 Average disposable income 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 Social Security Benefit ($pa) Type A households Disposable Income Social assistance benefits in cash The average disposable income after tax reduces as you move from Type A household (two employed parents) to the Type C household (employed single parent). 0 Lowest Second Third Fourth Highest Income Quintile 1,000 0 The average level of social security benefit increases as you move from Type A household (two employed parents) to the Type C household (employed single parent). The pattern of social security benefits between quintiles differs for the different family types. Reducing across all quintiles for Type A household, peaking at the second quintile for Type B household and peaking at the fourth quintile for Type C household. Disposable Income ($pa) 180, , , , , , , , , Average disposable income Lowest Second Third Fourth Highest 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 Social Security Benefit ($pa) Type B households Disposable Income Social assistance benefits in cash Income Quintile 100,000 20,000 90,000 18,000 1 This is the most recent report. ABS : Government Benefits, Taxes and Household Income, Lowest quintile represents the 20% of the population who have the lowest income levels. Second quintile represents the 20% of the population who have the lowest income levels excluding the lowest quintile. Third quintile represents the 20% of the population whose income levels are most typical of the population (it excludes the top 40% of income earners and the bottom 40% of income earners). Fourth quintile represents the 20% of the population whose have the highest income levels excluding the highest quintile. Highest quintile represents the 20% of the population who have the highest income levels. Disposable Income ($pa) 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 Average disposable income Lowest Second Third Fourth Highest Income Quintile 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 Social Security Benefit ($pa) Type C households Disposable Income Social assistance benefits in cash

26 Death Protection Gap in Australia 22 Impact of Insurance on Social Security Benefits Aggregate The impact of underinsurance on the level of social security benefits provided to families is estimated to be $11 million per annum based on Australian population mortality levels before the impact on tax revenue. A secondary but important impact of underinsurance on government revenue is the reduction in tax revenue. When a person dies and the family income is reduced, not only does the family receive a higher social security benefit, but the family is likely to pay less tax. If the reduction in tax revenue is included as part of the impact of underinsurance, the impact of underinsurance increases to $29 million per annum. The Individual View After the death of an income-earning parent, the household income would be reduced significantly. The insurance lump sum payout can be used to supplement the family income, after discharging the mortgage. The charts opposite show the impact of a family changing from a Type A to Type C or Type B to Type D household to a household following the death of an employed parent. In both cases, the surviving family: Annual Household Income ($) 140, , ,000 80,000 60,000 40,000 20,000 0 Type A Type C: Current Insurance Type C: Desired Insurance Social Assistance "Insurance" Disposable Income after Taxes Disposable Income after Taxes Has lower income than the family prior to the death; Has higher income with adequate insurance rather than the current insurance level; and Receives lower social security benefits when they have adequate insurance rather than current insurance levels, although the social security benefits are higher than prior to the death in both cases. Annual Household Income ($) 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 Social Assistance "Insurance" Disposable Income after Taxes Disposable Income after Taxes 0 Type B Type D: Current Insurance Type D: Desired Insurance

27 23 Underinsurance

28 Death Protection Gap in Australia 24