Life underinsurance is proving a drain on the public purse, with the total cost to government estimated at $47 million a year, according to a report by actuaries Rice Warner.

Total and permanent disability (TPD) underinsurance costs government $1.26 billion a year, while the income protection underinsurance exposure is $247 million a year.

“These figures show a vibrant and sustainable life insurance industry is vital to the future of the Australian economy,” Rice Warner Head of Life Insurance Richard Weatherhead said.

But with the cost of insurance rising, consumers may question the need for cover, he warns.

The report says the median level of life insurance across the adult population is 64% of basic needs with 42% of that needed to fully maintain remaining family members’ living standards.

Median levels of TPD and income protection cover are much lower, at 14% and 16% of needs respectively.

“These figures demonstrate that the life insurance industry needs to focus on a deeper understanding of individual clients’ insurance needs,” Mr Weatherhead said.

“Then insurance offers can be targeted at those with the greatest need, rather than on raising levels of cover across the board.”

The report says an Australian couple aged 40 with children needs life insurance worth about 10 times annual earnings just to repay debts and maintain lifestyles.

They will require the cover to maintain current living standards for either parent or their children until their youngest is aged 21, it says.

“However… for the family’s standard of living to be maintained in full, life insurance cover of 15 years’ income is required. Similarly, TPD cover equivalent to 15 years’ income is required.”