Let’s Not Ignore Personal Cover

BY:DAMIEN MU

From: The Australian

July 28, 2012 12:00AM

THE National Disability Insurance Scheme is a long-awaited and welcome federal government initiative designed to provide much needed support for those born with or those who later incur a significant disability.

Successful passage of this important reform would be significant progress. However, the debate around the NDIS is being framed in a way that largely ignores the broader problem of underinsurance.

We believe this represents an opportunity for the life insurance and superannuation industry because by supporting the NDIS we can also raise awareness of the significant protection gap that exists and reinforce the importance of personal insurance.

Putting to one side the debate playing out in the media, we are encouraged by the news that a trial is set to begin a year early, from mid-next year, with a $1 billion launch pledge confirmed in the federal budget. However, for the scheme to work effectively, there needs to be a national approach to ensure consistency and ensure that all eligible people have access to this important program.

As the federal government states on its website, “for the first time in Australia’s history, people with significant and permanent disability will start to receive care and support over their lifetime, regardless of how they acquired their disability”.

While the proposed national framework provides a safety net and much needed support for those people living with, or caring for, someone with a disability, it does not replace the need for individuals to manage their own income protection, serious illness and total and permanent disability insurance needs.

The proposed NDIS, in our view, is about providing funding for access, choice and improved support services for severely disabled people and their families, but it is important to understand that it will not replace the need for personal insurance.

The NDIS, as we understand, will not cover people for loss of income or assist with other living expenses such as the repayment of household debt in the event of short-term or permanent disability. Personal insurance also offers individuals greater financial freedom and helps to alleviate some anxiety and stress on individuals and family members. The two will complement each other and can work hand in hand.

Individually, the true level of TPD cover required for an average person who suffers a catastrophic injury or illness is estimated by Rice Warner Actuaries to be up to $4 million, when factoring in expenses such as long-term care.

AIA Australia claims data shows present levels of cover are far lower than this, with the average level of TPD claim at about $200,000.

It is also important to consider what underinsurance means in the context of disability. Understandably, a lot of attention has been given to the profoundly disabled, which is a positive development for people in this position. However, there is a significant gap between those who have a disability and the severely disabled.

Australian Bureau of Statistics figures show there are about four million Australians with a disability (which includes lower level and short-term disabilities) and about 1.25 million of those have a profound or severe disability. Only one-third of those with a severe disability will be covered by the NDIS.

This would leave a great number of people exposed who will not initially qualify for support under the scheme but can still obtain life insurance to protect themselves and their families.

It is important that the broader community understands the role of the scheme so it can help reduce, and work in parallel to address, the broader underinsurance issue and ensure all Australians have sufficient protection to cover them when they need it most.

Whether through a superannuation fund or a financial adviser, it is important to understand the right level of insurance for individual circumstances and we hope the NDIS discussion will provide a catalyst for all Australians to engage in their insurance needs and obtain the right level of support and care.

Damien Mu is the general manager of life insurance at AIA Australia