The Insurance Council says many New Zealanders are under-insured and exposed to great risk.
Research commissioned by the Financial Services Council estimates that people are under-insured in life and income protection by $650 billion.
Insurance Council chief executive Tim Grafton says New Zealanders are also typically failing to cover their house contents and vehicles.
The study suggests under-insurance for permanent disability, income protection, trauma and life cover is exposing families to serious financial risk and potential hardship.
Financial Services Council chief executive Peter Nielson says only about 20% of people in New Zealand have adequate insurance cover and about 60% would be vulnerable if they or their family lost income through death or illness.
Mr Nielson says the research found many people are deterred from purchasing adequate cover as they can't understand insurance jargon and don't want to consider being affected by trauma or illness.
Insurance Ombudsman Karen Stevens says people often fail to read their insurance policies and don't realise items such as jewellery are not included in their contents cover.
Sovereign Insurance's David Drillien says insurers need to do more to help people understand what cover they need.