Financial adviser Glen Hare answers his clients’ most frequently asked questions about insurance inside superannuation, and reveals how to make the right insurance choices.
What is insurance inside super (IIS)?
It’s default insurance provided by superannuation funds, most commonly life and total and permanent disablement (TPD) insurance.
What’s the difference between IIS and a retail (advised) policy?
There’s a significant difference. With IIS, you don’t have to go through the underwriting process. It’s automatically provided when you sign up to a superannuation fund. The fund, not the insurer, owns the policy and determines payout eligibility.
With a retail policy, you have to go through underwriting when you apply. While it can seem arduous answering all the questions, it also means the insurer has a clear picture of your health and situation, so they can offer you insurance that suits you individually.
What about income protection inside super?
Claims on Life insurance and TPD held within superannuation are relatively straight forward compared to Income protection. If you’re deemed terminally ill you can claim on your superannuation. But if something happens to you that’s not life threatening, and you need to make an income protection claim, then your super fund, not the insurer, has the final say on paying your claim. A retail policy for income protection means you will deal directly with the insurer. It’s also worth knowing income protection is generally tax deductible if you pay for it through a retail policy.
How do I work out what level of insurance cover I need?
Remember that life insurance isn’t for you directly – it’s for those you leave behind so they don’t have to experience financial hardship. Therefore, when deciding the level of insurance cover you should take into account what your loved ones will need after you’ve gone.
Some basics to consider are:
- The mortgage – what is the minimum cover needed to eliminate mortgage debt?
- Education – are you paying private school fees or will need to in the future?
- Time to grieve – do you want to provide enough for the people left behind to take time off work with a secured income so they can go through the grieving process without worrying about bills?
TPD is for you while you're still alive but unable to work and also to provide for your partner or family. Think about how much you might need to cover:
- Medical treatment
- Modifications to your home
- Basic living expenses for the rest of your life.
What is a minimum and maximum amount of IIS cover?
With life cover, if you’re young, living at home or renting, have no partner, children, or debt, your need for life insurance is much less than someone with a mortgage, children and other dependants. Some people have policies in excess of $1 million, others much less.
TPD is more complex. For example, if you become totally and permanently disabled in your early 30s, you could live for a long time without being able to earn an income. A baseline figure might be $650,000, which isn’t really that much for the rest of your life. If you invested those funds the interest earned could help generate a small income to help you maintain some quality of life.
The main thing is to check is how much insurance cover you have inside your super, and work out if it would be enough if you ever had to claim it.
Find out more about Insurance Inside Superannuation.
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