Our own demise isn’t something we like to think about. But none of us knows what tomorrow brings, and if you’re raising a family, have several dependants or high debt, life insurance is a necessity. In a perfect world, we’d all also have total and permanent disability (TPD) cover, income protection insurance and trauma (or critical illness) insurance.
The trouble is, all this cover doesn’t come cheap. The good news is that your super fund can be an easy, low-cost source of personal insurance. Funds arrange group cover for a large number of members – buying in bulk. So the premiums can be lower than for equivalent cover outside of super. The key is to know what protection you have.
As Chesne Stafford, Chief Customer and Marketing Officer, MetLife Australia, pointed out, around 50% of working Australians know they have insurance in super. The problem is “not many people think about it much, check the cover is right for them or consider the adequacy of cover”.
This ‘she’ll be right’ approach can leave you or your family financially high and dry if the unexpected happens. Take the time to know what you’re covered for through super, and how much cover you have in place.
What is included in default cover?
Most super funds offer default cover, meaning you are automatically insured unless you opt out. In general, default cover will include:
Total and Permanent Disability (TPD) cover, which provides a payout if you have an accident or illness that prevents you from being able to work again.
Life insurance (or more appropriately death cover), designed to support your family or other beneficiaries if you pass away.
However, exactly what you’re covered for can vary among funds. Some include income protection cover (also known as salary continuance cover) in basic default insurance. This protects you if you can’t work for a short period due to an accident or illness. With other funds, members may need to opt in for income protection, and pay an additional premium.
Play it safe and find out for sure. “It’s easy to check the insurance you have in your super – just get in touch with your super fund. They will be able to tell you who your insurer is, what type of insurance you have and how much you are covered for,” Ms Stafford said.
Many super funds also have apps that let you access your account and see your cover.
You could be underinsured
While your fund can explain how much cover you have, it’s up to you to assess whether the level of cover is sufficient. That’s a key downside of default cover – it doesn’t take your personal needs into account, and fund members can be left shortchanged if they need to make a claim.
The Underinsurance in Australia 2020 report from Rice Warner (now part of Deloitte) confirmed an ongoing gap between how much cover many Australians have through super and how much they need. This gap can be greatest for young families.
As a guide, Rice Warner found a family with parents aged 30 needs basic life insurance worth an average of $561,000 and TPD cover of $874,000, per parent. However, an Australian Securities and Investments Commission review of the default cover 20 different MySuper products offered found the combined payout of life cover plus TPD averaged just $420,515 for a 30-year-old.
Your cover should reflect your needs
Bear in mind, the level of default cover with your fund doesn’t stay the same throughout your working life. Life cover can peak at age 40, tapering off thereafter. This may be fine if you started a family at a young age but it’s likely to be insufficient if you delayed having children until your 30s or 40s.
“It’s important to check you have the right level of cover for your needs. Think about your life stage and what expenses you would need to cover,” Ms Stafford said.
“If you’re young, you might only have a mortgage to pay. If you’re a little older, you may want to think about expenses associated with your children’s education.
If you’ve had children but they have moved out and you no longer have a mortgage, your needs will be different again.”
Taking out the guesswork
There are a range of tools available to help pinpoint how much cover is right for you. Take a look at Canstar’s life insurance calculator or head to your super fund’s website. It is likely to feature an online calculator that lets you crunch the numbers to decide the appropriate level of cover for your situation.
How to increase your cover
It’s possible to increase or decrease your insurance through super. This lets you be sure you only ever pay for cover you need.
Ms Stafford pointed out that increasing your life insurance through super can require completing a medical questionnaire or undergoing a medical check. This can be a hassle, and how much extra you pay will depend on your circumstances, including your age and health status.
Nonetheless, there can still be good reasons to upgrade cover through your fund, rather than arranging insurance independently. “The premiums are automatically deducted from your super account and there can be tax benefits to paying this way,” Ms Stafford explained. For example, pre-tax super contributions are taxed at 15%. This is likely to be less than your marginal tax rate, so super can offer a cost-effective way to give your cover an uptick.
Beware the impact on retirement savings
The downside of increasing your cover through super is the impact on your long-term retirement savings. The Productivity Commission found average premiums for default cover can be about $300 a year, though potentially as high as $2,000 annually.
This is money coming straight out of your super, and over the course of a working life it has the potential to reduce your final balance on retirement by as much as 14%. That’s not just because of the cost of premiums. You’re also missing out on the compounding returns the premiums would have earned if the money had stayed in super.
Speak with your fund to learn what you’re covered for, decide if you need more protection, and ask how much any additional cover would cost and the probable impact on your super balance. This can help you strike the right balance between meeting your insurance needs and minimising the impact on your nest egg.
Are you even covered at all?
Don’t simply assume you have cover in place through your super fund. Three situations can potentially leave you with zero cover.
If you’re under 25: Funds cannot deduct insurance premiums for new members under 25 unless they opt in. The exception may be if you work in a dangerous job. Some funds continue providing cover if you’re employed in a dangerous occupation but you have the option to cancel the cover.
Your super is below $6,000 or inactive: Regardless of your age, funds can’t deduct insurance premiums on super accounts with balances below $6,000, or those that haven’t received contributions for at least 16 months. If that sounds like you, contact your fund if you want to maintain cover.
You don’t have sufficient super to pay for premiums: If you were among the Aussies who withdrew money from super under the COVID-19 early release of super scheme, you may not have enough left in the kitty to pay insurance premiums. Contact your fund to check.
See whether you’re doubling up
Four million workers hold more than one super account. Along with doubling up on fees, having multiple super balances can also lead to what the Productivity Commission calls ‘zombie insurance’. This is cover, such as income protection, that can usually be claimed only through a single policy. So you could be paying duplicate premiums for policies you can’t even claim on.
Check whether you have any lost or unclaimed super savings. You can do this through the myGov portal or your fund’s service for finding lost super.
If you have more than one fund, consider rolling the balances into a single account. Be careful though. When you leave a fund, your insurance cover doesn’t go with you. When you’re switching to a completely new fund, it may be difficult to arrange cover if you have a pre-existing condition like heart disease or high blood pressure, or if you’re over 60. Check with your new fund before bailing out of an old one where cover is in place.