Superannuation And Life Insurance: What's The Connection?

Life insurance is a financial safety net that can provide peace of mind for you and your loved ones. Many people are not aware that they may already have life insurance through their super fund. In fact, most super funds offer some level of life insurance, also known as death cover, as part of their benefits package. This type of insurance pays a lump sum or income stream to your beneficiaries in the event of your death or terminal illness. It's important to note that the level of cover provided by super funds may not be sufficient for everyone, and it's up to each individual to decide if they need life insurance, and if so, how much cover they require. This decision should take into account personal circumstances, such as age, health, income, financial commitments, and the number of dependents.

Life insurance vs. death cover

Most super funds offer life insurance, also known as death cover, as part of their regular superannuation products. This type of insurance pays a lump sum or income stream to your beneficiaries upon your death or if you have a terminal illness. It is important to note that this is different from accidental death insurance, which will only pay out if you die from an accident and not from an illness or disease.

Life insurance or death cover can provide peace of mind for you and your family, ensuring that your loved ones are financially secure in the event of your death. It can help them pay for ongoing expenses such as rent or mortgage repayments, children's education expenses, daily living expenses, and even the costs of hiring a housekeeper or nanny.

When reviewing your insurance, it is essential to check if you already have life insurance through your super fund. Most super funds will automatically provide you with life cover, but the level of cover may be set at a default rate. Therefore, it is crucial to review your policy to ensure you have adequate protection. You can usually increase your level of cover through your super fund if needed.

Compared to purchasing life insurance outside of your super fund, getting it through your super has several pros and cons. Here are some key points to consider:

Pros

• Cheaper premiums: Super funds often buy insurance policies in bulk, resulting in lower premiums for members.
• Easy to pay: Insurance premiums are automatically deducted from your super balance, making it convenient and straightforward.
• Fewer health checks: Most super funds offer a default level of cover without the need for health checks, which can be beneficial if you have pre-existing health conditions.
• Increased cover: You typically have the option to increase your cover above the default level, but this may require answering medical questions and undergoing a health check.
• Tax-effective payments: The tax rate on your employer's super contributions and salary sacrifice contributions is usually lower than your marginal tax rate, making this option more tax-efficient.

Cons

• Limited cover: The level of cover provided by super funds is often lower than what you could get by purchasing life insurance separately.
• Cover can end: If you change super funds, stop contributing, or your account becomes inactive, your life insurance cover may end.
• Reduces your super balance: Insurance premiums are deducted from your super balance, reducing your savings for retirement.

In conclusion, life insurance or death cover through your super fund can provide valuable financial protection for your loved ones in the event of your death. However, it is important to weigh the pros and cons to determine if this option meets your specific needs and circumstances. If you are unsure, consider seeking advice from a financial adviser or planner.

Total and permanent disability (TPD) insurance

TPD insurance pays out a lump sum if you become totally and permanently disabled, which can help cover rehabilitation costs, debts, and future living expenses. The definition of "totally and permanently disabled" varies between insurers, so it is important to read the product disclosure statement (PDS). Some policies cover you if you are unable to work in your previous job, while others only pay out if you are unable to work in any job suited to your education, training, or experience. The latter type of policy is cheaper but has a higher threshold for making a claim.

When deciding whether to purchase TPD insurance, it is important to consider your expenses and how you would cover them if you were permanently disabled and unable to work. These expenses could include living costs, debt repayment, medical and rehabilitation costs, and savings for retirement. You should also consider other sources of financial support, such as private health insurance, trauma or income protection insurance, savings, or investments.

If you already have TPD insurance through your super fund, you can increase your level of cover by contacting your fund. You can also purchase additional TPD insurance from an insurance company, either on its own or packaged with life cover.

Income protection insurance

Most super funds offer income protection insurance as an optional extra, with insurance premiums determined by the desired level of cover. It is worth noting that income protection insurance does not cover redundancy or loss of income due to business closure or lack of shifts.

To find out if you have income protection insurance through your super fund, you can call your super fund, access your super account online, or check your super fund's annual statement and Product Disclosure Statement (PDS).

Opting out of insurance cover

When considering opting out of insurance cover, it's essential to review your insurance and compare it with what's available outside of your super fund. This will help you find the right policy for your needs. You can do this by calling your super fund, accessing your super account online, or checking your super fund's annual statement and Product Disclosure Statement (PDS). It's worth noting that super funds typically offer default insurance, which may not be tailored to your specific circumstances. Therefore, it's important to understand your personal situation and responsibilities when deciding whether to opt out of insurance cover.

If you decide to proceed with opting out, you can do so by contacting your super fund. You may need to provide written instructions to avoid any future disputes. Keep in mind that if you have multiple super funds, you may be paying multiple insurance premiums, which can reduce your retirement savings. Additionally, if you have insurance through another super fund or insurer, you may want to keep that in mind before opting out of your current cover.

It's also important to be aware of the changes to the law regarding automatic insurance cover. Insurance is no longer automatically provided to new super fund members under 25 or with balances under $6,000. However, you can opt-in to receive insurance by contacting your super fund. On the other hand, if you have existing insurance and your balance falls below $6,000, you usually won't lose your insurance.

Checking your insurance

When checking your insurance, it is important to understand the different types of insurance covers available through your super fund. Typically, super funds offer life cover, total and permanent disability (TPD) insurance, and income protection insurance.

Life cover, also known as death cover, pays a lump sum or income stream to your beneficiaries upon your death or if you are diagnosed with a terminal illness. TPD insurance provides a benefit if you become permanently disabled and are unlikely to work again. Income protection insurance, on the other hand, provides regular income for a specified period if you are unable to work due to temporary disability or illness.

It is worth noting that the level of cover provided by your super fund may not be sufficient for your needs, especially if you have a large mortgage or high levels of debt. Additionally, the cost of insurance premiums can reduce your super balance over time. Therefore, it is important to review your insurance regularly and consider whether you need to increase your cover or explore alternative options outside of your super fund.

If you are under 25 or have a low super balance, there may be additional considerations for your insurance cover. From 1 April 2020, individuals under 25 are no longer provided with automatic insurance cover and must apply for it through their super fund. Similarly, super funds are prohibited from automatically providing insurance cover for members with balances under $6,000. However, there are exceptions for those working in dangerous occupations.

By regularly checking and reviewing your insurance through your super fund, you can ensure that you have adequate protection and make adjustments as needed. This gives you peace of mind, knowing that you and your loved ones will be financially secure in the event of unforeseen circumstances.

Frequently asked questions