What's driving underinsurance in Australia?

We all want to protect what matters most. But there’s a growing gap between the insurance cover people have and the cover they actually need. It’s called underinsurance, and it’s more common than you might expect.

According to our Choosi Insurance Gap Report, fewer than one in three Aussies have life insurance (29%), and only 14% hold income protection insurance. Many are either underinsured or not insured at all. If something unexpected happens, that shortfall can have serious consequences.

So, what’s behind the insurance gap, and what can we do better to protect ourselves?

We sat down with financial advisor Glen Hare to explore the key drivers of underinsurance, from confusion about policy terms to cost considerations and how to make more informed choices to secure the right type and level of insurance cover.

What is underinsurance?

Underinsurance can happen when your level of insurance cover isn’t enough to meet your needs in the event of a claim. It could be a life insurance policy that wouldn’t fully support your family financially if the worst were to happen, or home & contents insurance that wouldn’t cover the cost of rebuilding or replacing everything you’ve lost.

Sometimes it’s about not having enough cover. Other times, it’s about having the wrong type of policy, or no cover altogether. Either way, it means your safety net may not be there when you need it most.

For example:

• A young parent might take out life insurance when their first child is born, but never update it, even after buying a house or having more children.
• A renter might skip contents insurance, assuming their belongings aren’t valuable enough to cover, without realising how quickly things like tech, clothes, or furniture can add up.
• Someone with income protection insurance might assume that a default policy through their super fund is adequate enough, when it might not be the best fit for their needs.

And they wouldn’t be alone. The Choosi Insurance Gap Report found that nearly two in five Australians (39%) with life insurance rely entirely on their super fund for that cover, and over half (56%) do the same with income protection insurance. However, insurance through super may not always offer the right level of cover for your needs.

“Unfortunately, the biggest mistake we see people make when it comes to personal insurance is they investigate what they may have (often through super) when it’s too late.” — Glen Hare

The reality is that underinsurance often goes unnoticed until it’s too late. According to the same Choosi report, one in five have gone into debt due to being uninsured or underinsured, with the average debt sitting at $28,286.

“Not having the right level of insurance cover can lead to the inability to maintain your current lifestyle, the need to sell the family home, and not meet financial obligations — such as children’s education. Without the appropriate level of cover, you could be left with no way to support yourself, your family, or jeopardise your future financial security.” — Glen Hare

Why Australians are falling short on insurance cover

The reasons behind underinsurance are layered and often deeply personal. However, some clear themes have emerged in recent research, including insights from the Choosi Insurance Gap Report.

Confusion around insurance products

One of the biggest contributors to underinsurance is simply not knowing where to start. Policies can often be dense with jargon, exclusions, and subtle differences between products that make them difficult to navigate.

In fact, two in five Aussies (39%) have taken out insurance without fully understanding the policy. The top reason? They assumed it covered what they needed (42%).

“Determine how much insurance you may need. Consider who’s financially dependent on you, your current financial obligations, and your future financial needs.” — Glen Hare

This confusion can lead people to:

• take out the wrong type of insurance policy;
• underestimate how much cover they need; or
• delay making a decision altogether.

Perceived cost barriers

Another major reason people go without adequate cover is the belief that insurance is too expensive.

According to our report, 60% have delayed or avoided insurance due to financial concerns, with private health (38%) and life insurance (31%) most commonly skipped.

"Underinsurance in Australia is being driven by soaring costs of both insurance premiums and the cost of living more broadly, coupled with consumer behaviour and a broad lack of awareness.” — Glen Hare

That said, cost perception doesn’t always match reality. More than half (56%) choose lower-cost or minimal insurance just to save money, especially for comprehensive car (40%), private health (33%), and home & contents (30%) insurance.

“Understand the types of insurance available, research and compare products in the market, weighing up the pros and cons of each.” — Glen Hare

While reducing premiums might seem like a smart short-term saving, it could potentially leave you exposed in the long term, especially if an unexpected event leaves you needing to make a claim.

Low financial literacy

Financial literacy plays a huge role in shaping insurance decisions. Around one in five (18%) say they’re minimally confident when it comes to understanding insurance terms. The most confusing? “Underwriting” (33%), “indemnity” (29%), and “agreed vs. market value” (25%).

Nearly two in five (39%) have purchased insurance without full comprehension — often due to time pressure, trust in a provider, or simply not realising the policy was unclear until it was too late.

While most Aussies say they value financial literacy, only one in five feel they have access to enough information to make informed decisions, highlighting the need for clearer tools, guidance, and personalised financial advice.

“Seek professional advice from a licensed financial adviser.” — Glen Hare

How to bridge the gap and secure the cover you need

While underinsurance seems daunting, there are practical steps to take to make more confident, informed decisions and avoid falling into the underinsurance trap.

Here are a few practical places to start:

• Reviewing your current policies: Less than two in five (38%) of life insurance holders review their policy at least once a year. Your needs can change quickly, and your policy should keep up.
• Understanding your needs: Consider your income, mortgage, dependents, health risks, and future expenses (like a child’s education). Tailor your cover accordingly.
• Seeking guidance: Whether through a trusted adviser or a comparison site, you don’t have to do it alone. In fact, 74% say digital tools help simplify insurance decisions.
• Asking the right questions: What’s excluded? What’s the waiting period? What’s the benefit limit? Don’t be afraid to clarify what’s unclear; it’s your right as a customer.

“Review your policies regularly to ensure you have the appropriate level and type of cover.” — Glen Hare

Need help finding the right insurance for you?

There’s no one-size-fits-all when it comes to insurance, and that’s okay. The key is making sure your cover reflects your current needs, not your past ones. By understanding what’s driving underinsurance, it’s possible to take a more active approach toward financial security.

If it’s been a while since you’ve checked your policies, now’s a great time to take stock. Choosi can help you compare options available from their Approved Product List and help you find cover that fits your needs and budget, so you’re not left underinsured when it matters most.