Life Insurance And Underinsurance in Australia: The Risks & Costs Related To Being Underinsured

Life insurance is designed to give you and your loved one’s financial peace of mind if something unexpected happens, such as being diagnosed with a terminal illness. When you take out a policy, it’s important to review the details carefully to make sure you have the right level of cover should you ever need to make a claim. Otherwise, you could risk being underinsured.

In this article, we’ll define ‘underinsurance‘ and provide you with insight into why it happens. We’ll also provide tips for avoiding underinsurance – such as using an insurance calculator and updating your policy if your life situation changes. Keep reading to learn how to make sure your life insurance offers a good level of financial protection for you and your family.

Key takeaways

• Underinsurance in life insurance is when the level of cover provided by your insurance policy is insufficient to meet your financial needs or those of your dependents in the event of illness, injury, or death.
• A finding from the NobleOak Life Insurance Pulse Report (April 2025) found that almost one in four Australians with life insurance believe they are underinsured.
• Default life insurance cover within superannuation is often not enough.
• Life changes such as marriage, having children, or buying a home can all impact your coverage needs.
• Online tools (such as the NobleOak Life Insurance Calculator) can guide your life insurance calculation to see if you are underinsured.
• Speaking with a financial adviser can also help you understand your true cover requirements and reduce the risk of being underinsured.
• By calculating your needs and commitments accurately, it’s possible to find a good level of protection without overspending.

What does it mean to be underinsured?

Being underinsured means your life insurance policy (otherwise known as Life cover or Death cover) may not provide enough financial support to meet your family’s needs if you were to pass away or become terminally ill. In practical terms, this could mean your payout might not be sufficient to cover ongoing living costs, mortgage repayments, debts, or your children’s education expenses – leaving your loved ones financially vulnerable during an already difficult time. You could also find yourself underinsured with other life insurance products that you hold, such as Income Protection which provides regular payments during your benefit period cover if you were to become ill or injured and unable to work.

How common is underinsurance?

Unfortunately, underinsurance is more common than many Australians realise. According to the NobleOak Life Insurance Pulse Report (April 2025), almost a quarter (23%) of people who hold life insurance believe they have less cover than they need, which is a noticeable increase from 18% in the previous year’s survey.

The report also highlights that underinsurance is believed to be even more prevalent among those who hold life insurance through their superannuation, with 27% believing they are underinsured compared to an average of 18.5% through other purchase channels. This reflects findings from previous studies, which have shown that default superannuation cover often provides only approximately two-thirds of the death cover most households need. This is partly because life insurance cover provided through superannuation is not tailored to individual needs but instead provides more generic cover for the people that sit in that superannuation fund.

Why does underinsurance happen in Australia?

There are many reasons why Australians may find themselves underinsured when it comes to life insurance. For some, it might be that they simply don’t realise they’re underinsured, meaning they’re at risk if they ever need to claim. For others, affordability can play a role.

Here are some of the most common reasons:

• Reliance on default life cover in superannuation: Many Australians rely solely on the default life insurance provided through their super, which often falls short of covering a family’s full financial needs.
• Lack of awareness about actual life insurance needs: It can be difficult to estimate how much cover is required to maintain a household’s lifestyle, pay debts, or support dependents.
• Affordability concerns or misperception of cost: Some people assume life insurance is too expensive, when in reality, tailored policies can often be more affordable than expected.
• Complex policies and confusing jargon: The language used in some policies can make it challenging to understand what’s included, leading people to underestimate their coverage needs.
• Life changes not reflected in policy updates: Marriage, having children, buying a home, changing jobs, or retiring can all affect how much cover you need. Without regular reviews, your policy may no longer match your current situation.

NobleOak’s Senior Manager, Direct Product and Propositions Miguel Cortes offers this insight:

“It’s common for people to assume the cover in their superannuation will be enough, or that life insurance is out of reach financially. In reality, many Australians are unknowingly leaving their families exposed. This is why it’s so important to review your cover regularly to make sure it reflects your current lifestyle and responsibilities.”

Risks of being underinsured

Being underinsured can have serious consequences. Without the right level of cover, the safety net that life insurance is meant to provide may not be enough when it’s needed most.

Here are some of the key risks associated with underinsurance:

• Financial hardship for dependants: If your life insurance payout isn’t sufficient, your family could struggle to maintain their current lifestyle. Expenses such as mortgage repayments and school fees can become overwhelming without adequate support.
• Loss of income replacement: Life insurance is often used to replace the income you would have provided. If your cover is too low, your dependents may not have enough funds to meet long-term financial commitments.
• Emotional and psychological stress on family members: Financial insecurity adds to the emotional strain of losing a loved one or facing a serious illness.
• Wider economic strain on society: When individuals or families are underinsured, the financial impact can extend beyond the household. Increased reliance on government assistance and community support places greater strain on the wider economy.

How much life insurance do you really need?

The amount of life insurance you need depends on your personal circumstances – including your income, debts, family situation, and future financial goals. There’s no one-size-fits-all approach, but the key is to ensure your cover is sufficient to replace your income and support your dependents if you were no longer able to.

Here are some factors you should consider before taking out a life insurance policy:

• Current and future living expenses
• Outstanding debts
• Dependents’ needs
• Existing assets and savings
• Funeral expenses

More detail about this can be found in our guide: How Much Life Insurance Do I Need In Australia?

Common misconceptions about life insurance

Far too many Australians underestimate the importance of life insurance. These common misconceptions can lead to significant gaps in protection, leaving families financially vulnerable if the unexpected was to happen.

Here are some of the most frequent myths that contribute to underinsurance:

“My super cover is enough.”

Many people assume that the default life cover within their superannuation fund will meet their needs. The reality is that life insurance within super is often not enough, given this cover doesn’t take into account your personal circumstances. For families with children, in particular, the gap between what’s provided and what’s needed can be substantial.

“Life insurance is too expensive.”

Cost is one of the biggest perceived barriers to getting life insurance, but the reality is often quite different. Many people are surprised to find that tailored cover can be more affordable than expected, particularly with a reputable insurer offering flexible options.

“I’m young and healthy, so I don’t need it yet.”

It’s easy to think life insurance only matters later in life, but accidents and illnesses can strike at any age. Taking out cover while you’re young and healthy not only helps you lock in lower premiums but also ensures protection when you need it most.

“I’ll have to time to sort it out later in life.”

Many Australians in their 20s and 30s are underinsured or uninsured because they think life insurance is something only older people need to worry about. However, waiting until a major life event (like buying a home or starting a family) can mean missing out on more affordable premiums and comprehensive cover options that are available earlier in life

How to avoid being underinsured

Now that we’ve unpacked the topic of underinsurance and explained why it can lead to serious problems, let’s now look at the steps you can take to avoid being underinsured:

Step 1: Review your policy regularly

As your life unfolds, it’s likely that your personal circumstances will change. For this reason, it’s wise to check the details of your life insurance policy on a yearly basis.

Major life events like getting married, buying a home, starting a family, or changing jobs can all affect how much cover you require. What may have been sufficient a few years ago might now fall short.

Whenever a significant life change occurs, you should make the time to review your policy. This process doesn’t always mean increasing your cover; in some cases, it may mean adjusting it to better reflect your current situation.

Step 2: Assess your real financial responsibilities

One of the most effective ways to avoid underinsurance is to take a closer look at your actual financial responsibilities. Start by listing your key financial obligations (such as, for example, mortgage repayments, household expenses, and any outstanding debts). Then consider future costs that may arise, including your children’s education or long-term care for dependents. This gives you a clearer picture of how much protection your family would truly need.

If you’re unsure, speaking with a qualified financial adviser may be a good idea. A professional can provide you with underinsurance examples and help you adjust your policy so it accurately reflects your unique situation and goals.

Additionally, online tools such as life insurance calculators can help you estimate the level of cover required based on your personal circumstances. Visit the NobleOak Life Insurance Calculator to receive your free life insurance report.

Step 3: Understand policy exclusions 

Even if you’ve chosen the right amount of life cover, it’s essential to understand exactly what your policy includes. Many Australians experience underinsurance not because they lack a policy, but because they aren’t fully aware of the exclusions that apply to their cover.

Policy exclusions refer to specific circumstances where an insurer will not pay a benefit. Common exclusions can include pre-existing medical conditions or high-risk activities. Knowing these details helps you avoid surprises and ensures your expectations align with your actual protection. With fully underwritten cover such as that provided by NobleOak, the insurer will make it very clear to you as to what exclusions might be applied to your cover in order to keep the costs of the premium lower and you can choose to accept that exclusion or potentially pay more (known as a loading) to keep that condition within your policy. Partially underwritten cover provided by some other life insurers might not be as clear as to what is covered under the policy. Make sure you are clear on what you will be covered for when assessing which life insurer and policy is best to protect yourself and your family while maintaining cost affordability.

Step 4: Budget for the right level of cover

It’s natural to want to keep costs manageable, but reducing your life insurance cover to save money can leave you underinsured. Instead of focusing solely on the premium, it’s important to consider life insurance as a potential long-term financial safeguard for your family’s wellbeing.

Start by setting a realistic budget for your life insurance that aligns with your household income and expenses. Consider how much your family would need to maintain their standard of living if your income was no longer available. Then, weigh this against what you can comfortably afford to pay in premiums each month.

You may also wish to explore bundling your life insurance with other types of cover, such as total and permanent disability (TPD) or income protection insurance. Combining policies through a single provider can sometimes offer cost savings and more comprehensive protection against a wider range of risks.

How to be properly insured but not spend a fortune

Balancing your life insurance premiums with everyday living costs can be tricky, especially if you’re raising a family. Here, we’ll provide some tips for finding a life insurance policy that is affordable while also providing you with adequate coverage:

1. Understand your own needs

Most insurance companies offer a wide range of products – but you may not need all of them. To decide on what products you need, it’s important to assess your financial situation, state of health, and life stage.

For instance, life cover for new parents may provide protection at a time where there are added financial responsibilities. Or some people may opt for income protection insurance to protect their earning potential when they get a new job or promotion.

You can find more information about this in our guide: When to consider taking out life insurance. Another useful tool is an online underinsurance calculator – visit the NobleOak Life Insurance Calculator to get started.

2. Check products and prices with multiple insurance providers

It’s always a good idea to check prices and policies with multiple insurance providers before you make a decision. Make sure that you look through and research every detail of the policy, including the Product Disclosure Statement (PDS).

Discover tips for finding a suitable and affordable life insurance policy in our guide to comparing life insurance in Australia.

Address common risk factors

When calculating your premium, insurance providers consider a range of risk factors that help determine the likelihood of them needing to pay a claim. A lot of these factors will be out of your control. For instance, your age and family medical history aren’t factors that you can change.

On the other hand, there are other risk factors that you can do something about:

• Smoking can increase premiums substantially.
• Excess body mass index (or obesity) often impacts the cost of your premium.
• Health is of course a key factor. Drinking less, eating healthier, staying active, etc. will help improve your health. If you have a chronic disease, these health factors become even more important in order to manage your symptoms and the progression of your condition.
• High-risk hobbies, including sports like skydiving, paragliding, and mountain climbing increase your chances of bodily harm. You may represent a high risk, and some insurance companies might not be able to provide you cover for that particular high-risk pursuit.

Award-winning life insurance

Noble Oak is an award-winning life insurance company that offers a range of life insurance types and policies to fit your needs. We’ve won Canstar’s Outstanding Value Award for Direct Life Insurance nine years in a row, thanks to our focus on offering clear, easy-to-understand affordable products.

Use our online quote tool to receive an estimate about life insurance premiums with NobleOak. You can also contact our knowledgeable team on 1300 041 494 to discuss your options. 

Any financial product advice is general in nature only and does not take into account your individual circumstances, objectives, financial situation, or needs. Before acting on it, please consider the appropriateness of the information, having regard to those factors. Any third party websites or tools referred to are subject to their own terms and conditions and NobleOak Life Limited makes no representation or warranty as to any information on those websites. Persons deciding whether to acquire or continue to hold life insurance issued by NobleOak Life Limited should consider the relevant Product Disclosure Statement and Target Market Determination for the product. NobleOak Life Limited ABN 85 087 648 708 AFSL 247302.