Buying insurance through super has many advantages, but you need to make sure you are getting the right cover for your individual needs. In some cases, you may be paying for nothing.
Most super funds offer life and total and permanent disability (TPD) insurance to fund members and, in some cases, income protection cover.
But since the introduction of the Protecting your Super reforms in 2019, this cover is no longer automatic.
If you have less than $6000 in your account or it has been inactive, then the insurance component will have been cancelled unless you advised the fund otherwise. An account may be deemed inactive if, for example, it has not received a contribution for more than 16 months.
In addition, insurance cover is no longer offered to new fund members aged under 25.
If you do have insurance in your super account, then it’s a good idea to check the cover is right for you. This is particularly the case now that the stapling measure has been introduced as part of the recent Your Future, Your Super legislation.
From November 1, unless you choose a new fund when you change jobs, the first fund you joined will be ‘stapled’ to you throughout your working life. This is where problems can arise; while the fund stays the same, so will the insurance cover.
Say you move from a low-risk job where the insurance offered in your super was more than adequate to a high-risk job such as in construction or mining. Would your insurance now cover you if you were no longer able to work? And if it did, would the cover be sufficient? It may well be that your new occupation is not even covered.
Most TPD policies within super are for “any” occupation rather than “own” occupation. This three-letter definition can make a world of difference. If you still have the capacity to work in some other occupation, then it is likely your insurance will not pay out.i
Despite this, there are still many benefits from having insurance cover in your super. Firstly, the premiums are generally lower because the fund buys the insurance cover in bulk. In addition, your premium payments are effectively lower as they come out of your pre-tax rather than your post-tax income.
What’s more, you are not having to put your hand in your pocket to pay the premiums as the money automatically comes out of your super. Of course, the flipside is you will have less money working to build your retirement savings.
So, when it comes to taking out insurance, going through your super has lots of positives.
But the downside is that the default level payout may be lower than you might need. You should check if this is the case and maybe consider making additional premium payments to give yourself and your family more appropriate cover. Be aware though that opting for a higher payout could mean you have to undergo a medical.
Also, life insurance cover in super actually reduces over time to the point where your cover reaches zero by the time you are 70. And for TPD cover it ceases at 65.ii
Wherever you get insurance cover, it’s important to remember that its purpose is generally to cover any outstanding debt and ongoing financial obligations should you pass away or become unable to work.
For this reason, it is important to regularly check your insurance within your super to ensure it is sufficient to maintain your lifestyle.
If it falls short, then you might also consider taking out a policy outside super.
While income protection is sometimes available through your super, it may be necessary to look outside. Such policies pay you a regular income for a specified period if you are unable to work through an illness or injury, and premiums are tax-deductible outside super.
When you are leading a busy life with lots of claims on your income, insurance may be seen as an unnecessary expense. But when it comes to the crunch, it can play a valuable role in you and your family’s life when you need it most.
Please call us to discuss your insurance needs and whether your existing cover, both inside super and outside, is sufficient.