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Insurance held inside your super fund can be tricky to understand, but it’s an easy – and cheap – way to ensure you and your loved ones are financially protected if something goes wrong.
To helpcut through the confusion, SuperGuide has put together a simple explainer of the key concepts you need to understand.
There’s also a 7-step guide to help you take control of the insurance cover available through your super fund.
What is default insurance inside super?
When it comes to life insurance, Aussies generally hold their cover through their super account. This is because most super funds offer basic default insurance to members when they join the fund.
In most cases, you receive this default cover automatically when you join the fund (this is called automatic acceptance). You are not required to undergo the normal underwriting process, which often means providing health information or completing a medical examination. Automatic acceptance can be a real benefit for older members, or people with existing medical conditions who can’t access cost-effective cover outside super.
You are free to stick with the default level of cover provided by your fund or to adjust your policy to suit your personal circumstances by increasing your units of cover.
The premiums for default insurance vary and depend on your risk factors. In most super funds, your account is charged monthly for your premiums. It’s worth noting that super funds negotiate directly with life insurers to buy insurance on behalf of their members, so your premium is usually cheaper than purchasing a similar policy outside super.
Insurance cover: What is available from my fund?
The first thing you need to know about insurance inside super is that it’s not a single type of insurance. In fact, most funds offer three different types of cover to members:
- Life insurance – This is sometimes referred to as death cover and pays your beneficiaries if you pass away. Learn more about life insurance and super.
- Total and permanent disability (TPD) insurance – These policies pay you a regular income or a lump sum if you are totally and permanently unable to work as defined in the policy. Learn more about TPD insurance and super.
- Income protection insurance – Sometimes called salary continuance insurance, these policies provide a regular income if you are unable to work for a period. Learn more about income protection insurance and super.
Pros and cons of insurance inside super
- Discounted, affordable premiums
- Premiums paid from your super account, not your after-tax income
- Tax-effective as premiums are paid from pre-tax income
- No personal health information or medical required
- Easily availability of cover due to automatic acceptance
- Cover is usually simple to change as your circumstances change
- Policy information is easy to access via the fund’s website
- Effective for estate planning, as death benefits can be tax-free to spouses and children aged under 18
- Cover amounts may be smaller than outside super and can be less than recommended for younger members
- Multiple super accounts mean you could be paying premiums for multiple default policies
- Premiums can erode your super savings
- Definitions, exclusions and restrictions to policies can be complex and restrict your payout
- Default policies may be insufficient to cover some disability and injury claims
- Cover may not be transferrable – or available at the same level – if you switch super fund
- Life insurance generally only available up to age 65-70
- Income protection benefit periods and cover are often limited compared to outside super
- Income protection payouts may take longer as the insurer pays via your fund
How much insurance cover do I need?
Now you understand the basics of insurance inside super, it’s important to think about how much cover you need.
According to the actuarial firm Rice Warner, most Aussies have an underinsurance gap, meaning they hold significantly less life insurance than they actually require. The biggest gap is among parents with young children.
The firm’s Underinsurance in Australia 2020 report found this gap is growing, with most Aussies only having cover for 29% of their TPD needs and 92% of their death needs. This is a concern, as most people need TPD insurance more than death cover, particularly when they are young or have dependents.
How much insurance cover you need depends on your personal situation, but according to Rice Warner research, the average basic level of death and TPD insurance needed by an Australian family is:
|Age of parents||Basic level of death cover needed||Basic level of TPD needed|
Source: Rice Warner Actuaries
7 steps to take control of your insurance inside super
Once you have a rough idea how much insurance cover you need, you can start taking action:
Step 1: Check your existing insurance cover
- Log into your super account to find what insurance cover you currently hold (death, TPD and/or income protection cover).
- Check how much protection your current insurance provides.
- Check the current premiums being charged to your super account. These will be listed on your annual member statement and are often charged on a monthly basis, so they usually appear in your account transactions.
Step 2: Review the details of your insurance policies
- Find the insurance PDS and any other documents outlining the details of your insurance policy on your fund’s website.
- Read the policy documents to get an overview of your cover and what is and isn’t covered by your policy.
- Check for any special conditions or exclusions that could affect your cover (such as working part-time, casually or in a hazardous occupation).
Step 3: Assess your current financial situation
- Think about how much insurance cover you would need to meet your financial responsibilities if you couldn’t earn an income due to ill health.
- Consider how much your partner and dependents would need to maintain their current lifestyle if you passed away. This includes paying off your mortgage, regular bills, funding private schooling and additional childcare or home help if your partner needs to return to work.
Step 4: Check your cover is correctly structured
- Consider if you need to adjust or increase your insurance based on your age and financial dependents. Your need for insurance protection is higher the more you are dependent on receiving a regular income.
- Check you have nominated the right beneficiaries to receive your benefit if anything happens to you. For more information, read SuperGuide article Who gets your super when you die? A guide to death benefit nominations.
Step 5: Research insurance offerings in other funds
- Review what insurance products other super funds offer. Many funds have been tailoring their cover and policy rules in response to new legislation and changing member needs.
- Check out insurance policies where claims are paid in instalments rather than as a lump sum, as this may reduce the waiting period before you receive your first payment on a claim.
- Compare the standard definitions used in different policies, as some definitions reduce uncertainty and the risk of not being paid.
- Check to see if other super funds offer simpler and more personalised products or have a better claims process.
Step 6: Contact your super fund for advice
- Ask your super fund for information about their cover and other options they offer members.
- Review what happens to your insurance cover if you change your super fund. Check whether you can opt in and out of cover and if it will affect your protection in the future.
- Consider making an appointment with an independent financial adviser (either through your super fund or externally) if you need more personalised advice about how much cover you need and the types of policies available to you.
Step 7: Adjust your current insurance cover
- Download the necessary documents from your fund’s website and change your cover so it better meets your current personal situation.
- Don’t cancel your existing insurance cover until your new cover is in place
- Be wary of opting out of default cover at a young age as you could find yourself underinsured just when you need it and your financial commitments are starting to increase.
- Talk to an independent financial adviser if you need to top up your default insurance cover with insurance outside super.