- 1. Competitive life insurance cover, in most instances
- 2. SMSFs must consider life insurance
- 3. Minimum cover when don’t choose your super fund
- 4. Looking after your children in worst-case scenario
- 5. One in five parents unable to work, or die before retirement age
- 6. Disability insurance can be even more valuable
- 7. Income protection insurance
- 8. Automatic basic cover
- 9. Choosing your own super fund may mean no life cover, or more expensive cover
- 10. Taking out extra insurance cover
- More articles about superannuation and insurance
One of the better deals in superannuation has only a slight connection to your life in retirement. Life insurance cover within super funds rarely makes the headlines but for many Australians they are getting cost-effective cover from their super funds.
Life insurance is insurance that pays out in the event that you die before your time, and before retirement age. It’s difficult enough to get many Australians interested in superannuation and retirement, so to then take it one step further and encourage Australians to talk about the possibility of dying is near impossible.
Warning: Life insurance may be a shocking deal however for those Australians who hold more than one super account; each account having insurance premiums deducted from the account balance. Duplicate or triplicate premium payments does not mean duplicate or triplicate insurance cover, and such a scenario is in effect money down the drain for those fund members with multiple super accounts charging multiple insurance cover.
We have a compiled a list of 10 important facts that we hope will give you a greater understanding of the relationship between your super account and life insurance and other types of insurance.
1. Competitive life insurance cover, in most instances
If you’re a member of a large super fund (such as an industry fund or retail fund or public sector fund), and you joined the super fund via your employer, then you’re likely to have access to a competitive deal in life insurance.
In most cases, any super fund that you have joined via your employer, will provide life insurance at very competitive rates because you will be covered under a ‘group’ policy rather than individual policy which spreads the risk over a greater number of people and generally means better rates.
For some individuals however, such as young healthy women, the group rates may be slightly higher than if they applied for life insurance as an individual, although the benefits of having your super fund pay the premiums often outweighs the cost difference.
2. SMSFs must consider life insurance
If you run a self-managed super fund, then you need to be aware that you are legally required to consider the life insurance needs of each SMSF member when considering your fund’s investment strategy. This requirement does not mean that you must take out life insurance within your SMSF.
For more information on this see issue, see SuperGuide article SMSFs must consider life insurance needs.
3. Minimum cover when don’t choose your super fund
If you don’t choose your own super fund, then your employer (unless an industrial award or agreement is in place) must have chosen a super fund that provides minimum life insurance cover. If you don’t choose your super fund, but an industrial award or agreement is in place, then minimum insurance cover is also provided but the super fund that provides this cover (which is also the super fund that accepts your super contributions) is set out in the industrial award or agreement.
Fortunately, most Australians are members of super funds that provide at least minimum cover in the event of a member’s death.
Note: If you choose your own super fund, you don’t have to have life insurance cover within your super account (see Fact 9 below).
4. Looking after your children in worst-case scenario
If you have children or other dependants, then thinking about life insurance and what would happen if you die, is a necessary albeit confronting exercise. If you have life insurance cover via your super fund, and you die, do you know who will receive the life insurance payout?
Equally, do you know who will receive your super benefits when you die? The answer to this question is very important for two reasons. One, if you don’t nominate your beneficiaries (and even sometimes when you do), the super fund may pay out your insurance and benefits to someone you didn’t expect. Two, insurance payouts to non-dependants are subject to a hefty tax bill, while insurance payouts to dependants under the tax laws are tax-free.
I explain the difference between dependants and non-dependants in SuperGuide article Superannuation death benefits: Who receives super payments, and how much tax is paid?.
5. One in five parents unable to work, or die before retirement age
If the fate of your children or spouse is not enough incentive, then the disturbing findings from a 2010 study should motivate you to at least review your existing life insurance cover (if you have any). According to the Lifewise/NATSEM Underinsurance report, one in five parents will be unable to work, or will die, before retirement age.
I explain the findings of this report in the SuperGuide article Life insurance: One in five parents will die early, or be too sick to work.
6. Disability insurance can be even more valuable
Your life insurance cover is usually packaged with disability insurance, which means your super’s insurance policy also covers you if you become permanently incapacitated in specific circumstances. Disability insurance is also known as total and permanent disability (TPD) insurance.
For some of the best deals in death and TPD, see SuperGuide article Comparing super funds: Top 20 cheapest funds for life insurance.
For older information on the cost of death and TPD see SuperGuide articles Cost shock: Paying too much for insurance in your super fund? and Comparing super funds: Which super funds offer the cheapest insurance?
7. Income protection insurance
Many super funds also offer you income protection insurance; in the event that you are unable to work for a period of time due to illness or injury.
For the pros and cons of buying income protection insurance via your super fund, see SuperGuide article Four reasons to buy insurance inside your super fund, and for indicative costs of such insurance, see SuperGuide article Comparing super funds: Top 20 cheapest funds for income protection insurance.
8. Automatic basic cover
Many super funds automatically provide members with basic insurance cover, known as default cover. The deal with basic cover is that you don’t have to undergo a medical to receive this cover, and you don’t have to pay higher premiums for this basic automatic cover when you suffer a pre-existing health condition.
Under automatic cover, you can expect one or two units of death and permanent disability cover, which is a dollar amount based on your age, and sometimes, based on your occupation. This level of insurance is generally not an adequate level to look after your family if you become sick, or die, but at least it’s a good start.
You may belong to a super fund that also automatically gives you basic income protection insurance to cover you in the event that you temporarily can’t work because of illness or injury. Or you may belong to a super fund that automatically provides basic death cover only.
9. Choosing your own super fund may mean no life cover, or more expensive cover
Automatic basic insurance cover is only available under certain circumstances. You generally have access to basic cover if your employer is an employer-sponsor of the super fund. What this means is that your employer has a contractual arrangement with the trustee of the superannuation fund to pay super contributions.
If you join a fund as an individual rather than via an employer-sponsored arrangement, you don’t automatically receive basic insurance cover. In these circumstances, you must complete a personal health statement detailing your medical history. You may also need to have a medical assessment.
10. Taking out extra insurance cover
For most Australians, basic cover will not be sufficient to look after your family if you get sick or die. If you want to take out extra cover with your super fund, you’re likely to have to undergo a medical, or at least complete a comprehensive medical questionnaire. The premiums for any extra cover that you take via your super fund, is then deducted from your super account.
In summary, super funds can provide fund members with three types of insurance cover:
- Life insurance (or death benefit) cover
- Total and permanent disability (or invalidity) insurance (TPD)
- Income protection (or salary continuance) insurance
More articles about superannuation and insurance
For more information on super and insurance see the following SuperGuide articles:
- Comparing super funds: Top 20 cheapest funds for life insurance
- Comparing super funds: Top 20 cheapest funds for income protection insurance
- Cost shock: Paying too much for insurance in your super fund?
- Comparing funds: Which super funds offer the cheapest insurance?
- Four reasons to buy insurance inside your super fund
- Life insurance: One in five parents will die early, or be too sick to work
- SMSFs must consider life insurance needs
- SMSFs: Can I transfer my life insurance to my DIY super fund?
- SMSFs: If I die young, will my wife pay super tax on the life insurance payout?
- SMSFs: Trauma insurance is not OK