The life underinsurance gap in Australia is now estimated to be $9692 billion, according to a new report by actuaries Rice Warner.

On an income replacement basis, the level of life underinsurance is $3073 billion while total and permanent disability (TPD) sits at $7182 billion.

Income protection underinsurance is estimated at $437 billion.

But despite the large figures, Rice Warner MD Michael Rice says the total life underinsurance gap has reduced during the past six years.

As at June 2010, the overall level of underinsurance was $669 billion to meet the subsistence needs of families and dependants after death.

“This compares with $1000 billion in 2005 on a like-for-like basis – a reduction of 33% over the six years,” Mr Rice said.

“Increased levels of personal insurance have been driven by an increase of default cover within superannuation, a greater focus on risk insurance by financial advisers and superannuation fund trustees as well as the growing direct life insurance market.”

Apart from the effect on families, there is also a substantial cost to the Federal Government.

“Currently the total cost to the Federal Government of life underinsurance across Australia is calculated to be $140 million per year, as publicly funded social security benefits fill the gap,” he said. 

“Meanwhile the situation regarding disability underinsurance is even more serious, costing the Government nearly nine times this amount.”

Mr Rice says the Government could boost sales by removing stamp duty from all life, TPD and income protection policies.

“It should also remove the GST on TPD and income protection products sold by general insurers, as well as equalising tax treatment of life insurance inside and outside superannuation.”

Mr Rice also believes the proposed “scaled advice” model should be implemented by the Government, with an emphasis on life insurance.