One of the value add-ons your super fund will probably provide, even if you don’t ask for it, is life insurance as part of your account.
Sounds great right, but like any financial package, there are pros and cons to consider.
First, what’s on offer.
Super funds generally provide three types of life insurance.
- Life cover, which really means death cover, pays a lump sum or income stream to your beneficiaries when you die or have a terminal illness.
- Total and Permanent Disability (TPD), which covers the eventuality if you become seriously disabled and are unlikely to ever work again
- Income protection, which pays a regular income for a specific period if you can’t work due to a temporary disability or illness.
Which all sounds like normal life insurance, but super fund insurance is a little bit different in that TPD usually ends at age 65 and life cover usually ends at age 70. Normal life insurance lasts as long as you pay the premiums.
Legally super funds must also cancel insurance on inactive super accounts, which is defined as a fund that has not received contributions for at least 16 months.
That’s what’s required legally, but each fund may have its own rules for cancellation including low balances. They must inform you if they are going to cancel your insurance.
Anyway, back to the pros and cons.
According to the government financial advice site MoneySmart, the big issues are:
Pros
- Premiums are often cheaper as the super fund buys insurance policies in bulk.
- Easy to pay – insurance premiums are automatically deducted from your super balance.
- Most super funds will accept you for a default level of cover without health checks. This can be useful if you work in a high-risk job or have health conditions that can make it difficult to get insurance outside super. Check the product disclosure statement (PDS) to see the exclusions and treatment of pre-existing conditions.
- You can usually increase the amount of cover you have above the default level. But you’ll generally have to answer questions about your medical history and do a medical check.
- Tax-effective payments – your employer’s super contributions and salary sacrifice contributions are taxed at 15 per cent. This is lower than the marginal tax rate for most people. This can make paying for insurance through super tax effective.
Cons
- The amount of cover you can get in super is often lower than the cover you can get outside super. Default insurance through super isn’t specific to your circumstances and some eligibility requirements may apply.
- If you change super funds, your contributions stop or your super account becomes inactive, your cover may end. You could end up with no insurance.
- It reduces your super balance – insurance premiums are deducted from your super balance. This reduces your savings for retirement.
- If you have multiple super funds, you may be paying multiple insurance premiums, which will eat into your savings.
- If you change funds and have a pre-existing medical condition or are aged over 60, you may not be able to get the cover you want.
If life, TPD or income insurance is important to you, it’s probably a good idea to explore and price insurance other than what your superannuation fund offers.
A report by superannuation and wealth management specialists Rice Warner found that the median default cover of superannuation funds meets only 65 to 70 per cent of basic level death cover needs for an average household and a much lower proportion for a family with children.
By law your fund must provide a PDS that explains who the insurer is, details of the cover and how to make a claim.
If you want to check the level of your superannuation insurance, check your online account, which should provide what type of insurance you have, how much cover you have and how much you are paying in premiums.
For more information, check out Canstar’s handy comparison table for superannuation insurance.
Do you know what your superannuation fund insurance covers? Do you have extra insurance anyway? Why? Why not share your tips in the comments section below?
