Insurance inside super: A definitive guide

Most super funds offer default (basic) insurance cover for life and TPD bundled together, meaning it applies automatically once you join a fund, either through your employer or by yourself. You can choose to stick with the default level of cover or adjust it to suit your circumstances. About a third of funds offer default income protection to eligible members, although it is less common than life and TPD.

Default premiums usually cost anywhere from $200 to $500 per year on average, depending on your age and level of cover. These are usually debited monthly from your super account as “units of cover”. You can generally check this online by logging on to your super fund’s website. Premiums can go as high as $2000 per year depending on your risk factors. The premiums increase with age, and then reduce again at older age as funds reduce the default level of cover.

There are risk loadings for premiums for hazardous and blue-collar occupations. For example, ‘light’ blue collar products are 20–40% more expensive than comparable white-collar products, while ‘heavy’ blue policies can cost twice as much as their white-collar counterparts.

Advantages of insurance inside super

One of the biggest benefits is the affordability of premiums. Super funds buy in bulk from an insurer and get discounts they pass on to you. You can pay these premiums from your superannuation savings, non-concessional contributions, as a salary sacrifice arrangement if you are an employee, or as a tax-deductible contribution if you are self-employed.

They are tax-effective as premiums are debited from your super account, and not from your after-tax income. This also helps you from a cash flow perspective. Premiums are generally tax deductible to your super fund and depending on how they account for this according to ATO rules, they may pass this onto you.

You also generally won’t need to provide personal health information or undergo a medical – it may only be a few simple questions to answer, if that. Funds call this “automatic acceptance”. The insurance risk of all members is pooled, rather than you being assessed directly. The ease of which cover is available to you is also another major benefit of insurance inside super.

Many funds allow you to change your cover relatively simply, such as lowering or increasing your premium based on your work, health or personal situation.

Life insurance in super can also be effective for estate planning. Death benefit payouts to spouses and children under 18, in the case of life insurance, are tax-free and can be a lump sum and/or income stream depending on the fund. Most fund websites are user-friendly with handy information and documents, with online forms to select beneficiaries, and tables that explain how much cover is available and its cost.

Disadvantages of insurance inside super

Claim payouts may be restricted to a multiple of your salary (in the case of income protection), and it may take longer for you or a beneficiary to get a payout. This is because the insurer pays it to the super fund, who then has to distribute it to the nominated persons. If a benefit is paid to a non-dependant adult child of yours, tax of up to 30% may apply. Taxation of death benefits is a complex area, especially for estate planning, so seek appropriate advice when structuring your affairs.

Make sure you read the product disclosure statement (PDS) closely for various definitions, exclusions and restrictions. Should you ever need to make a claim, a super fund may not necessarily scrutinise the decisions of an insurer. The vast majority do – acting in the best interests of their members – but do your own research. This becomes important in a TPD case, for example, if there is to be a full, partial or nil payout.

Some in the industry question whether default cover matches well with the inherent complexity of disability or injury conditions. The Banking Royal Commission in 2018 saw several cases of member disputes over lack of payouts, with grievances either directly with a fund, or indirectly with the insurer that refused a payout on the grounds of policy definitions and whether a member met those conditions.

Life insurance cover inside super generally stops around age 65 or 70, and cover is often limited compared to policies outside of super. You may only get $300,000 of cover inside of super, whereas some financial advisers recommend a figure closer to $1 million may be more appropriate, especially if you have young children and debts such as a mortgage. This may be changing, though, as some funds are now offering much higher cover than before.

If your super balance is small, insurance premiums over time can erode your retirement savings. You probably cannot transfer your insurance coverage if you change funds either, although some funds seem are now adopting more flexible approaches to this. Transfer of cover does involve meeting certain rules and conditions of your new fund, so don’t cancel your existing cover until the new policy and structure is in place.

Beware of zombies – no, not the flesh-eating kind, but “zombie” policies. You may have multiple super accounts with multiple insurance policies, paying for something that you can never claim. The Productivity Commission final report estimates that it costs Australians $1.9 billion per year in excess insurance premiums! In 2017 an estimated 17% of members still had two or more accounts with insurance.

Income protection can be affordable if you elect longer waiting periods, but inside super the benefit periods can be more limiting along with the cover, which is not as comprehensive as policies outside super.

Take note of industry findings

Earlier this year the Productivity Commission’s report into super illuminated some interesting areas on insurance.

We mentioned above the erosion of super balances over time through the payment of premiums. The Commission identified this as a problem area, mostly for those with low balances, erratic attachment to the labour force such as casual workers or freelancers, or multiple accounts.

For low income members, balance erosion may reach up to 14% of their retirement balances, whereas for low-income earners who work irregularly and have several accounts, it could be over 25% of their balance!

The Commission estimates that a disadvantaged fund member earning $36,000 would lose the equivalent of three years’ pay by the time they retire. Insurers may argue that they have exclusions in group insurance cover to protect from this balance erosion, so it appears finding a satisfactory compromise is not easy.

In the 2018-19 Budget, the Australian Government announced proposed changes to insurance in superannuation arrangements. Perhaps with an eye on the scenario of eroding balances meaning higher age pension and social security outlays, these measures include changes to make insurance opt in only for some key groups of members with:

• Newly opened accounts and under 25 years of age
• Accounts that have balances of less than $6000
• Accounts that have not received a contribution in 13 months.

The measures are intended to take effect from 1 July 2019 but the bill has not yet been passed. Some industry players argue that an opt-in system would drive up premium costs and potentially leave millions of people uninsured or underinsured.

Whatever the case, it appears the answer may lie in a comprehensive approach. This would consider government benefits (e.g. disability pension and social security), insurance held elsewhere (e.g. standalone policies or any through another superannuation fund), workers’ compensation and any other payments or income streams, and how they interact (or not) to provide the right level of insurance cover for Australians.

Solutions also lie at the fund level, in terms of how premiums, benefits and claims are designed. One super fund offers fee-free insurance cover whilst on parental leave for 12 months. The onus may be on trustees to consider a more nuanced approach that, apart from traditional age and risk factors, takes into account people changing jobs, the ceasing of cover, low contributions and myriad work patterns. Another example is inadvertent delays in contributions, where members lose cover in situations outside of their control (such as employer contribution non-payment).

Take control of your strategy

How important is insurance to you – do you have multiple dependents, and are you nearing retirement age? Have you already started to draw down on super? Are you in your 20s and 30s and wondering if insurance inside super provides value for money? Use our checklist below to assess what is appropriate for you.

• Check your existing cover by going online to your super account, where your exact coverage and premium costs can be viewed.
• Read the insurance documents that explain what is covered, and what isn’t, under your policy.
• Assess your personal situation by adjusting cover if necessary based on your age and if you have any dependents, and ensuring any beneficiaries are nominated. Your need for insurance is higher when your dependency on income is at its greatest.
• If changing jobs, or fund membership categories, or stopping work for a period of time, contact your super fund to ensure your coverage remains or what their exact rules are.
• If insurance is critical for you, there is always the option to purchase other policies outside of super as they can co-exist together. Some companies offer flexi-linking where you can link your life cover in super with linked TPD Cover (inside and outside super) or linked trauma cover (outside super only). It can save on premium costs but any TPD or trauma payout may mean your life insurance benefit is reduced.
• If you are transferred from an employer plan to a personal plan inside the same superannuation fund, make sure you are not mistakenly classified on risk factors (such as a blue-collar worker if you aren’t) which could lead to higher premiums.
• Research funds that are innovative in their products. Many are now tailoring their products and business rules in response to the issues we have raised here. Some options include:
  • Opt in or opt out of coverage – be careful here as you may not be able to opt back in with your current fund.
  • Claims that can be paid in instalments rather than a lump sum, as you may benefit from a reduced waiting period.
  • Standard definitions which reduce uncertainty and the risk of being unreasonably excluded from receiving a claim.
  • Simpler and more personalised products, and improved claims processes.
• Be wary of opting out of default coverage at a younger age in an effort to boost your superannuation savings. You may find yourself underinsured at a point when your financial commitments are becoming significant.