Australians are happy to insure their cars, but surprisingly, few have any protection against the even bigger threat of a loss of income. With research showing one in five families will be financially impacted by the death of a parent, serious accident or illness, how much cover does the average family need?

While there are insurance policies for every kind of risk – from pet insurance to even protection against alien abduction – the main categories comprise life insurance, total and permanent disability (TPD), income protection and trauma; general insurance, such as home and contents and health; and business insurance.

“The first thing to do is take an honest look at your family's situation and consider what might happen if an insurance event occurred. Imagine if you woke up tomorrow morning and you or your partner could no longer go to work due to an illness or injury – what financial impact would that have long term,” says iPlan's Grant Loechel, a Certified Financial Planner and life insurance adviser.

“Where the event has the potential to cause financial ruin, it's vital to transfer the risk through buying insurance.”

95% of families underinsured
According to a 2010 report prepared by NATSEM for the life insurance industry, 95% of Australian families do not have adequate insurance and the typical family will lose half or more of its income following a serious illness, injury or loss of a parent, as a result of underinsurance.

For those who think it will never happen to them, 2008 data shows that 18 Australian families lose a working-age parent every day. 

“Every year, 235,790 working-age parents suffer a serious illness or injury and over 17,000 of them are forced to stop working, either permanently or for an extended period of time,” the report warns.

Ask yourself the key questions

Before rushing out to buy insurance, Loechel suggests asking the following questions:

•How would the insurance event affect my family?
•Could the remaining spouse immediately generate income to fill the gap?
•If not, are funds available or could relatives assist?
•What government assistance is available?
•If the spouse goes back to work, is a housekeeper or other assistance required?
•What would be the extra medical costs for treatment?
•Should I transfer the risk or keep the risk myself?

At a minimum, Loechel suggests insuring all debts and income, as well as lifestyle costs in case of TPD. Income protection insurance is tax-deductible and can cover up to 75% of income, while it is also worthwhile protecting the kids.

“A client's 18-year-old son developed aplastic anemia, a disease which affects the bone marrow. Fortunately they had taken out critical illness cover for their kids and received a $50,000 lump sum to cover the costs – enough for all the medical expenses and insurance premiums for the rest of their lives,” he says.

While Australians might not want to spend more on insurance, the facts suggest that it is a gamble just not worth taking for the average family's financial future.