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Insuring your life isn’t a fun topic to discuss, but having good cover in place through your super fund can make a big difference to your family’s lifestyle if something happens to you in the future.
Although it’s usually referred to as life insurance, in fact, life cover is insurance that only pays your beneficiaries when you die.
SuperGuide has put together a straightforward guide to help you understand the key issues in this complex area, plus a simple checklist of issues you need to consider.
What is life insurance (or death cover)?
Life (or term life) insurance is usually referred to as death cover by super funds.
The aim of death cover is to provide financial assistance to your dependents when you pass away. (Some policies pay out if you are diagnosed with a terminal illness.)
With death cover, the super fund pays a lump sum or income stream to your nominated beneficiaries on your death. If you don’t nominate a beneficiary, the super fund trustee decides who will receive your death benefit.
Generally, death cover is automatically applied to your super account when you join your super fund and is usually referred to as default cover. Many funds bundle it with TPD (Total and Permanent Disability) and income protection insurance.
Premiums: What death cover in super costs
The premiums for death cover inside super tend to increase with your age, making it cheapest for young fund members as statistically their risk of death tends to be lower. Many funds reduce the level of death cover available for older members, so your premiums may start to go down again as you age.
The average premium costs for death cover inside super vary depending on your age, gender, smoking status, occupation and the level of cover you hold. There is a significant difference between the cheapest and most expensive cover, so it’s worth checking out the premiums in other super funds. For more information, read SuperGuide article Super funds with the lowest fees for life and TPD insurance.
Super funds usually base their premiums on either unitised or fixed cover:
- Unitised cover is where the cost of each unit of cover stays the same over time, however, the amount of cover you get for each unit reduces as you get older. With unitised cover there is a risk you could be underinsured as you age.
- Fixed cover increases in cost over time, but the insurance level stays the same until you reach a specific age set by the fund.
How much life cover can I apply for?
Generally, most super funds only offer default death cover of between $100,000 to $400,000. This may not be sufficient to cover all your financial commitments, with some financial advisers suggesting a young family with a large mortgage living in a capital city would need at least $1 million to cover their financial commitments in the event the main income-earner dies.
Some super funds – particularly retail funds – allow members to apply for up to $5 million in death cover. However, as the level of cover increases, insurers apply more stringent risk assessments, meaning you will need to supply health information and undertake a medical assessment. Your premiums will also be higher.
If you work in what insurers classify as high-risk occupations – such as a blue-collar worker in a hazardous environment – higher levels of cover can be more difficult and expensive to obtain.
How much death cover do I need?
An adequate amount of life cover depends on factors such as your health and medical history, income level, financial commitments and number of dependents. A healthy single person earning a high income may need less death cover than a person with a partner, young family and large mortgage.
In its Underinsurance in Australia 2020 report, actuarial firm Rice Warner suggested for the average Australian family, the basic level of death cover needed by each parent aged 30 was $561,000. Parents aged 50, each needed $207,000 in death cover.
As death cover is designed to provide financial protection to your dependents when you pass away, the best way to work out how much cover you need is to calculate how much your dependents will require to pay off your current debts and continue their current lifestyle.
Expenses to consider include:
- Debts – Include mortgages on your home and any investment or holiday properties, credit card debts, car repayments and any outstanding loans, including personal and business debts.
- Living costs – Calculate your family’s normal expenses for food, clothing, travel, holidays and petrol.
- Regular expenses – Include regular household expenses, utility bills, medical and home insurance, school fees and childcare costs.
- Funeral expenses – Estimate the cost for your funeral and any legal costs associated with your death.
- Housekeeper and maintenance costs – Estimate how much it would cost to perform the unpaid duties you undertake, such as home maintenance, gardening, cleaning and child minding.
- Future income for a non-working partner – Consider the income your partner would need in the future and whether they would need to return to work.
What are waiting periods?
The period between your death and when your beneficiaries receive the insurance payout is usually referred to as the waiting period and is usually around one to two months with a straightforward claim.
Most super funds require a copy of the death certificate and most recent Will before paying a claim. If there is a valid and binding death benefit nomination in place, your super account balance and insurance proceeds are paid to your beneficiaries as a super death benefit.
If there is no valid binding beneficiary nomination, payment of the death benefit can be more complicated, as the fund trustee has discretion over who receives the insurance benefit.
To avoid delaying payment of your death benefit, ensure you have a valid binding death benefit nomination in place. It’s also sensible to regularly review this nomination as your personal circumstances change and your children leave home.
Tax and your death benefit
If you pass away, the payment from your death cover will generally not be taxed if it’s paid to your partner or a dependent. But the tax man will have his hand out for a cut of the money if the death benefit is paid to a non-financial dependent such as your adult children.
Next steps: Your death cover checklist
To decide what death cover strategy works for you, here’s a quick checklist of issues to think about:
- Calculate how much death cover your family would need to fund their current lifestyle if you died.
- Remember that even if you are young, you may need death cover so your family is able to pay your outstanding debts if you die.
- Opting out of your fund’s default cover may save money now but could make it difficult to opt-in at a later date if you need protection.
- Check to see if your fund allows you to increase or decrease your cover if specific life events occur (such as divorce, remarriage or an addition to the family).
- Talk to your super fund or an independent financial adviser for personal advice on how much death cover you require given your personal circumstances.
- Check the maximum amount of cover you can apply for with your current super fund.
- Get a quote from your fund for the premium cost for a higher level of protection than that provided by your default cover.
- Consider whether you are prepared to provide health information or undertake a medical examination to obtain a higher level of cover.
- Compare the death cover provided by different types of super funds (industry, retail and corporate funds), as some funds offer higher cover and more flexible policy options.
- Weigh up the option of having another policy outside super if you need significant insurance protection.
- Investigate the level of death cover available through insurance outside super.
- Never cancel your existing insurance cover until you have new cover in place, or you risk being left without insurance protection.