IP underinsurance and optimism bias
/Our optimism knows no bounds, it seems, since human beings cannot (or choose not to) foresee sickness, disability, and death, despite the fact that the chances are fairly high - at least at some point. Discussing and planning for our own demise seems intrinsically negative, pessimistic, or cynical, and a lot of people feel as if the mere thought of it - let alone preparing for it financially - will be the harbinger of disease and destruction. It may be thoroughly superstitious or more often, simply does not occur to us due to our innate optimism bias.
Optimism bias
When we try to predict what will happen to us tomorrow, next week, or forty years from now, we overestimate the likelihood of positive events, and underestimate the likelihood of negative events.
What this means is losing earnings due to disability or disease also doesn't occur to us, and therefore we don't prepare for the eventuality. There are a few reasons for this, however, outside of human nature.
Historically, the government was more helpful
To give this a little bit of context, we can look back into history a bit. As financial services evolved, it became clear at some point in the last century that if the main income-earner kicks the bucket, we're left with exactly no income and will fall destitute and crumble into a pile of dust. Because we are industrious, a financial product was therefore invented to allow a gamble on whether this blight or the other would get us or not.
If you think about families 100 years ago, with women not able or allowed to work, men the only income-earners, and no reliable birth control, we were left with an inevitable and crushing poverty problem waiting to happen (and happen it did). The government can only do so much - it can keep you alive and kicking, but it can't get you ahead, it can't save for your retirement, and it can't buy you nice things. This is not ideal.
Government provisions for those who can't make it on their own are cut further and further all the time, forcing us to rely more heavily on private insurance plans like income protection and life insurance, the two products that most commonly solve some of our financial woes in an emergency. Australia has almost 10 million people living with disability or chronic illness, with obesity the new disabler.
The transition from public purse to private pocket has not gone smoothly - people don't know that the government has no intention of increasing disability and welfare payments, are forcing people to work for longer into old age, and will continue to cut pension payments well into the future as we find ourselves with more people over 60 than under.
We are not being told clearly enough, by the right people, why income protection insurance is important and valuable, and this means swathes of middle-income Australians are falling through the gaps at crunch time. Government benefits are paltry and insufficient, particularly if you're in the midst of a more expensive (read: moderate, enjoyable) lifestyle when disaster strikes. This leaves us horribly exposed, and most of us don't even know it.
A US survey threw out numbers that suggested that out of those in poverty, two-thirds of women and one-third of men were in that position due to insufficient life insurance. Anyone disabled long-term is in the same poor position, and it's much harder to return to previous income levels after dipping down into poverty and disability.
A European study found that anyone who self-identified as disabled was 15 per cent more likely to live in poverty and suffer social exclusion than people without disability. Retirement savings may be raided for immediate problem solving post-disability, further diminishing the pot. There is (usually) no getting that cash back.
How a lack of income protection insurance for employees costs businesses money
The Zurich/Oxford Smith School report (2015) explains that if people are not adequately protected, and job prospects are heavily diminished for people living with minor disability, workers may choose to work through their relatively minor injury or illness with reduced capacity. This costs businesses money, and is called 'presenteeism' - you show up to work, but you are not working at your optimum. According to this report, presenteeism costs US businesses US$150 billion per year.
Australia is better off than the United States by some important areas, including accessibility to affordable healthcare, so this number cannot be transposed to our situation with any accuracy, however Medicare certainly doesn't exclude us from the same sorts of problems. The casual and part-time workers of Australia encounter this situation more often, and they are the least able to afford income protection insurance, and most likely to have no backup in case of emergency. The great majority of hospitality, labour, and retail workers can't afford to get sick or hurt themselves.
Due to an ageing - and more-disabled-than-ever - population, demand for financial support and jobs means the pressure put onto full-time taxpayers continually grows. Sustainability is a major challenge, and governments are looking to the private sector more and more to fill these gaps. Consumers, on the whole, are just not aware of this shift, and there is no education filling the gaps. The underinsurance gap is going unnoticed by a sceptical public that is running on old-school time with negative attitudes towards insurance brokers and their money-grabbing reputation. The public of Australia has very little time for insurance of any kind, except cars and maybe contents, and this means middle Australia is falling through closable gaps. Income protection in Australia is the least popular cover type which isn't that much of a surprise - our optimism bias combined with the relatively high cost are off-putting.
This makes the insurance gap more an education gap plus optimism bias. The responsibility for educating consumers - and overcoming our innate biases - should really fall to the government, but what government wants to advertise how they are privatising our lives and cutting welfare and pension payments? Not ours.
The likelihood of cancer, as an example
People just don't understand how likely it is that something is going to go badly for them. This seems absurd, since a quick look at just cancer stats for Australia is a sobering reminder that we're all ultimately destined for the chopping block: half of all Australian men and one-third of all Australian women will develop cancer by age 85. Over 44,000 people died from cancer in 2013, out of about 130,000 diagnoses. The number of diagnoses and subsequent deaths are rising every year.
How we perceive risk
The Oxford study surveyed over 11,000 people in 11 countries to gauge our perception of risk, and then why and how we protect ourselves. Or not.
We underestimate risk globally and across the board. Our views on how likely it is that the main income earner will experience disability, illness, or die prematurely are very conservative - just under 40 per cent of those surveyed thought they had less than 10 per cent chance of this happening to them in their lifetime. This is primarily a financial literacy issue - optimism, overconfidence, underestimating risk, and overestimating costs is the norm.
Interestingly, out of those who had income protection insurance, two-thirds knew someone who had not been able to work at some point due to a disability. Only half the group knew someone living with disability. Financial advisers were ranked as the best source of information on income protection products, but financial literacy and engagement levels are low.
Do people want income protection cover as part of their salary package? It seems so. Part of the survey asked the question, with the following results:
- Forty-eight per cent said they would prefer salary benefits including income protection than higher pay;
- twenty-seven per cent said they would prefer higher pay; and
- a full quarter were not sure what they wanted.
When asked what they knew about disability insurance, only 19 per cent said they had a good to very good knowledge, and 38 per cent said they have little to no knowledge. Death cover saw similar results - about 15 per cent said they were on top of it, whereas 48 per cent said they had little to no knowledge about death insurance.
When it came to income protection, Australians didn't know or care - only 37 per cent said they would ever consider buying income protection cover, whereas the United Kingdom (42 per cent), Hong Kong (45 per cent), and Spain (46 per cent) were more interested.
How to move forward
The report, Income protection gaps: a rising global challenge, discusses how a three-party approach is preferred, with each part of the system supporting the others by taking its share of responsibility. We need a global approach to raise awareness of the problem, the report says, with tailored local actions like tax incentives and awareness pushes. Employers can also help by keeping their employees close to the business with income protection insurance policies.
See the breakdown of Australia's disability support systems and survey data
