Australian families are woefully underinsured when it comes to life insurance, says Swiss Re’s prestigious Sigma Report. Its latest study into life insurance in five markets examines the “protection gap” – the margin between the resources needed and the resources that would be available to maintain a family’s current living standard after the death of its primary earner.

The life markets in Australia, Germany, Italy, Taiwan and the US were examined for the study, which found that most countries’ life insurance buyers are not prepared for the worst.

Study author Christian Stöckli, a senior actuary at Swiss Re, said one of the most striking findings was that “each country we examined has a substantial mortality protection gap, despite many differences in how national markets operate”.

Each of the markets studied in the report has a sizeable protection gap, ranging from $US0.2 trillion for Taiwan to $US10.6 trillion for the US. Annual premiums needed to close the gaps range from 0.1% to 0.3% of GDP, equivalent to about a half-day’s wage.

Germany and Italy show “huge potential” for an increase in individual term life premiums. An average Italian would have to spend an additional $US141 a year, or more than six times the current annual individual term life premium, to meet his or her family's protection needs. In Germany, $US359 is required.

In the US, the average annual premium needed to fill the protection gap is $US444, or 104% of existing individual term premium.

And Australia? The report says local policyholders need to lift their annual premiums by 109%, or an average $US250 per person.

The report also identifies key factors that determine demand for life insurance. They include age, income, affordability, and wealth. “Although these factors help explain demand for mortality protection in the aggregate, individual decisions to purchase life insurance appear far less rational.”

The study says insurers, governments and employers should work towards closing the protection gap, suggesting greater workplace education, insurance industry initiatives and government incentives.

“Because governments must sometimes intervene to provide welfare, it may be prudent for them to offer employers and workers tax incentives to encourage adequate mortality coverage.”