For families with dependent children who would be financially impacted by the death of one or more parents, life insurance can be a vital safety net to protect them from hardship and even long-term poverty.
A life insurance policy enables dependents to receive money as a lump sum, to meet financial commitments, such as mortgage payments, school fees, car loans and general living expenses.
The level of cover purchased determines the size of the payout. Life insurance policies can be taken out for a fixed amount or indexed to increase annually to keep pace with inflation.
It can be tough for households with little or no life cover to maintain the lifestyle they previously enjoyed if they lose their breadwinner or even drop down to a one-income household unexpectedly.
Many Australian families are in precisely this position and would suffer a steep decline in living standards, should tragedy strike.
The underinsurance epidemic
Research shows that most families cannot meet their basic needs with their current level of life cover, according to Rice Warner’s ‘Underinsurance in Australia’ report conducted in 2015.
The reality for those who find themselves in this position is they must make significant changes to the way they live their lives. Such tough choices may include having to sell the family home and move to rental accommodation, switching children from fee-paying schools to the public system, and foregoing luxuries such as family holidays, extracurricular activities and dining out.
Individuals not previously in paid employment may be forced to return to the workforce in order to put food on the table.
Collectively, the consequences can be devastating, at a time when parents are least equipped to cope and would prefer to devote their energies to dealing with grief and supporting their children emotionally.
Cathy’s underinsurance story
Perth stay-at-home mother, Cathy Sullivan, found herself in dire financial straits after her husband Michael passed away unexpectedly.
While his life insurance payout enabled her to discharge the mortgage on their Tuart Hill home, there was nothing left over for the family.
With no job and seven children aged from one to 11 to support, Sullivan’s only sources of income were a widow’s pension and child endowment payments, a precursor to today’s family tax benefits, from the Department of Social Security.
"I didn’t have any life insurance myself and I used to say to Michael that if I died, there'd be no one to do the work," Sullivan says.
"As for his policy, what was good and proper when we had one child didn’t help so much when we had seven; it cleared the mortgage but that was all."
Struggling to make ends meet
The Sullivan family spent many years getting by on little more than $700 a fortnight.
"It might sound like a lot but try buying shoes and haircuts for eight people on that," Sullivan says.
Loss of the family breadwinner meant many years on a financial knife’s edge – second-hand clothes and uniforms, outings curtailed when petrol was low, months of scrimping to cover an annual camping holiday and a budget thrown into disarray when the family van broke down.
Getting to grips with the household budget and learning to stretch her funds a dozen different ways was a challenge for Sullivan.
"I was pretty panic-stricken about the finances," she says. "I hadn’t worked for years and Michael had always managed the money. Then overnight the centre of our family was gone, life was totally miserable and I realised I didn’t know how to budget. I’d just bumbled along when I was younger, got a car loan and paid that off, paid board…I managed, but it was all pretty scrambly."
Despite implementing a range of frugal measures, including menu plans and a separate bill account, and receiving assistance from family and friends and board from her older children once they started part-time jobs, things remained tight for many years.
"People sometimes gave me money and said, ‘this is not for you, this is for the children’," Sullivan says.
"I had to have a long hard think about accepting help and not being too proud to take it."
Priceless peace of mind
Underinsurance can change your family’s financial future significantly and force them to make difficult decisions in times of uncertainty, ANZ Wealth Adviser Emma Hickling says. The impact, both financially and emotionally, can be long lasting, as it was for the Sullivan clan.
Conversely, adequate life-insurance cover can provide peace of mind.
"It represents the capacity for your family to live the life you planned for them," Hickling says.
"There’s an enormous comfort to be had from knowing that financial issues won’t be on their horizon, should you no longer be around to provide or care for them."