Mostly, every super has some life insurance cover included in it by default. Certainly, its very basic and easy to get insurance. However, is it enough to protect you and your family when time arrives?
Statistically, over than 70% of Australians hold life insurance policies, among them more than 13.5 million separate policies, through their super funds.i However, despite this, many Australians are still remain under insurance.
The leading consulting, research and technology solutions to financial services industry Rice Warner estimates that the median level of life cover in super meets only 60% of the basic needs for the average household and less for families with children.
It is even worse in case of total and permanent disability (TPD) and income protection cover. The median level of cover in super will provide just 13% of TPD needs and 17% of income protection needs.
Certainly, having a little cover or protection is better than none. Due to convenience in setting up and payments, insurance in super is widely popular. However, it is wise to consider the flip sides of it too.
The cover is limited
Insurance in super mainly pays the insurance premium. It is certainly helpful for your regular cash flow. However, it also slashing your retirement savings if not contributing regularly as enough.
Mostly super funds offer standardised ‘off the shelf’ policies. It means basic product, which may not suit your needs but may offer a cheap price. It may not consulate if your policy falls short when you need it most.
Complexity at the time of claim
At the time of claim, the insurer will pay you through super, which means it may take longer time to receive the fund.
On the other hand, the fund trustees decides to who receives benefits when you die unless you make a binding nomination.
Life insurance paid through super can be subject to tax if paid to a non-dependent. For example, an adult child or if paid as an income stream (in some cases)
The tax deductibility of TPD insurance (held inside super) depends on your age, the component in your benefit and whether you receive a lump sum or income stream.
Chances are high that your beneficiaries may also be taxed more heavily as compare to insurance outside super.
A tailored solution
The need and objective of insurance varies from one to one. It is recommended to review it regularly along with your other financial affairs. Your life insurance should be reviewed whenever your circumstances changes. For example, you are justly newly married or have a child or got your new home etc.
It’s easy to underestimate what it would cost to ensure your family is well protected. Remember, partners who don’t earn an income and may not necessarily have adequate cover in their super, particularly where dependent children are involved.
Take the example of Ben, whose wife Merry, 43, passed away suddenly. Luckily, the couple had a full suite of insurance cover in and outside their super. Ben claimed on Merry’s life insurance, which covered his mortgage, and car loan repayments. It also allowed him to hire a part-time nanny to help with their two children.
Getting additional insurance outside super can be a little more expensive. However, it gives you access to a wider range of policies that can be tailored to your individual needs. Some policies, such as Trauma insurance, can only be bought outside super.
Even if you have some level of cover inside super, it is important to do your sums. Work out exactly how much your family would need to maintain your current lifestyle if you or your partner were to die or become seriously ill.
It may take a little time, but with so much at stake, guestimates will not do. But I will be very happy to assist.
Note: *The above information provided is general in nature. It is not to be relied upon as personal financial advice. As it has not considered your personal circumstances, needs or objectives.
i Ricewarner, Insurance through superannuation, 20 April 2016.