Many super funds provide Life & Disability cover for their members without their approval. The reason behind this is because your employer’s default fund must offer a minimum level of life insurance, depending on your age. The younger you are the higher the insurance cover. While you can choose to increase, decrease or cancel the cover completely, most Australians do not pay enough attention to their superannuation funds and leave the insurance cover as is. This insurance cover is not free and you are required to pay premiums (which are deducted from your superfund) for this cover.
Although this means that the majority of Australians have some form of cover protecting them and their families, the amount of default cover is normally considerably less than what is required or on the flip side cover that you do not need. For example, a well-known industry superfund automatically provides approximately $167,000 in Life & Disability insurance for a 30 year old. If this 30 year old has a mortgage and a young family and is the sole income earner of the household, $167,000 is not going to be enough. In contrast if the 30 year old is single, has no dependents and no debts, that person is likely not to need any life insurance at all.
Insurance cover should be tailored to meet each and everyone’s circumstances. The first step in determining the applicable insurance amount is to determine what kind of cover is needed.
There are 4 different types of personal Life insurance available to purchase and each one covers you for a slightly different scenario.
- Death Cover – This cover will provide your estate/beneficiaries with a lump sum in the event of your death.
- Total & Permanent Disability (TPD) Cover – You receive a lump sum benefit if you become seriously disabled and are unlikely to ever work again.
- Income Protection Cover- You receive monthly payments for a specified period if you can’t work due to temporary disability or illness.
- Trauma Cover – You receive a lump sum benefit if you suffer from a pre specified illness or injury (cancer, heart attack, blindness, loss of limbs)
While the first 3 covers can be held within superannuation the 4th cannot due to the inability to get the benefit out of your superannuation fund once it has been paid.
When deciding on the amount of insurance required, you need to decide what the insurance money will be used for.
Will you want the mortgage paid off if you were to die?
Do you wish to fund your kids education?
Do you want to provide your surviving partner with an ongoing income to help them fund their living expenses?
Do you want to leave money to charity?
Do you need money to fund a funeral or any medical expenses/rehab that may arise?
By having an understanding of what your insurance benefit will be used for, you can tailor the insured amount to your circumstances to ensure that not only are you not underinsured, but you are also not paying for any insurance cover that you do not need.
Once you have determined what cover you require and how much cover you require, you then need to decide whether to own the cover personally or to own the cover through your superannuation fund.
The benefits of holding your insurances through super are:
- It’s often cheaper because super funds purchase insurance policies in bulk;
- There may be a tax advantage because the premiums are paid from your super account, not your after-tax income;
- The premiums are not directly impacting your cash flow which may enable you to get the cover you need for you and your family without the need to find the money to pay for it;
- Assuming you will always have money in your superannuation fund, it’s easy to manage because premiums are automatically deducted and you will never miss a payment; and
- Some funds automatically accept you for cover without requiring a health check.
However there are also disadvantages in holding insurances through superannuation:
- The types of insurance available are limited (Trauma cover is not allowed);
- There may be restrictions on the amount of cover you can apply for either as a maximum amount or you may be required to purchase insurance in units rather than select the appropriate dollar amount.
- Although the superfund may receive tax deductions this also means that when the benefits are paid, there may be tax payable and so you/your estate may not receive the full benefit amount.
- There may be delays in receiving the life insurance payments as the insurance amount first needs to get paid to your superannuation fund and then the trustees need to pay it out to the beneficiaries.
- If you do not have a binding nomination in place, the superfund trustee will decide who the benefit is paid to (usually dependents) which may not match your wishes.
- If you change employers or your contributions stop, this may end your cover without notice.
- As the superfund owns the insurance and hence the money gets paid to your superfund, for the money to then be paid out of the superfund it has to meet the superannuation rules. Due to these restrictions, there are some benefits that you would receive if you held the cover in your own name but because of the superannuation rules they are not allowed to be included in superannuation policies. This generally means that the policies outside super are of a higher quality than the policies inside super (even when the provider is the same.)
While seeming simple, insurance can be a complicated issue. First you need to determine what insurances you need, then you need to determine how much. Once this has been decided the next step is to decide whether to hold the cover inside or outside super and finally the product that best suits you needs and circumstances. We at KT Associates are insurance experts and are able to provide you with guidance in all of these matters. If you wish to make an appointment with one of our experts please call 03 9331 6855.
The number one rule when dealing with insurance that everyone needs to be aware of is DO NOT CANCEL YOUR EXISTING INSURANCE WITHOUT ORGANISING REPLACEMENT INSURANCE BEFORE HAND. If you do not have another insurance policy in place, you may find yourself unable to get replacement insurance and since you have already cancelled your existing insurance, you now have no insurance cover and are unable to get any. When you rollover your superannuation funds, your insurance cover within those funds will be cancelled.