Superannuation: Life Insurance, What's Covered?

Life insurance is an important consideration when it comes to financial planning and ensuring your loved ones are provided for. Many super funds offer life insurance as part of their benefits package, but it's not compulsory. If you're wondering whether your super includes life insurance, it's worth checking with your provider. This is because while most super funds offer life insurance, it may not be automatically included for all members. For example, if you're under 25 or have a low super balance, you might not be covered unless you opt in. Additionally, the level of coverage provided by your super fund may not be sufficient for your needs, so it's important to review your policy regularly.

What is life insurance and what does it cover?

Life insurance is a contract between a policyholder and an insurance company that pays out a death benefit when the insured person passes away. It is a type of insurance contract where the policyholder agrees to pay premiums to keep their coverage in force. In exchange, the insurance company guarantees to pay a sum of money to one or more named beneficiaries when the insured person dies.

There are several types of life insurance, including term and permanent plans. Term life insurance covers the insured for a set number of years, while permanent life insurance covers the insured for their entire life unless they stop paying premiums or surrender the policy.

Life insurance can provide financial support to surviving dependents or other beneficiaries after the death of the insured policyholder. It can help fill financial gaps by paying for expenses such as rent, mortgage, funeral costs, school tuition, and personal debt. It can also supplement lost income, helping with day-to-day expenses.

The death benefit of a life insurance policy is usually tax-free and can be paid out as a lump sum or income stream to the beneficiaries. The policyholder can also choose to add optional coverages known as riders, which provide additional benefits such as access to the death benefit while still alive or coverage for accidental death.

The cost of life insurance depends on factors such as the type of policy, the insurance company, the age, health, and family history of the insured, and the amount of the death benefit. Premiums are typically paid regularly, and the policy remains in force as long as the premiums are paid.

In some countries, such as Australia, life insurance is often provided through superannuation funds, where it is known as death cover. This means that the premiums are deducted from the super account balance, reducing the savings for retirement. While it offers convenience and lower premiums, the amount of cover available may be lower than that offered outside superannuation.

How much life insurance do I need?

Life insurance is a crucial aspect of financial planning, ensuring that your loved ones are provided for in the event of your death. While it may be challenging to determine the precise amount of coverage you need, there are several methods and calculators available to help you estimate. Here are some guidelines to assist you in determining the appropriate amount of life insurance coverage for your specific circumstances:

Assess Your Financial Obligations and Resources

To determine how much life insurance you require, begin by evaluating your current financial situation. Consider your income, debts, savings, and any future expenses such as college tuition or funeral costs. Calculate your long-term financial obligations, such as mortgage payments or college fees, and then subtract your liquid assets, such as savings and existing life insurance policies. The resulting gap is the amount of coverage you need to ensure your dependents can maintain their standard of living.

Utilize Online Calculators

Online life insurance calculators can be incredibly helpful in determining your coverage needs. These tools consider various factors, including your age, income, number of dependents, and existing financial resources, to provide a more accurate estimate of the coverage amount required.

Consider Your Family's Needs

Think about the financial needs of your family, especially if you are the primary breadwinner. Consider their daily living expenses, future education costs, and any existing debts or mortgages. Ensure that the coverage amount is sufficient to cover these expenses and maintain their standard of living in your absence.

Account for Inflation and Future Income Growth

When calculating your life insurance needs, remember to factor in potential income growth over time. Your income is likely to increase, and so will your expenses, especially with inflation. It is advisable to build in a cushion to ensure your loved ones can maintain their lifestyle and meet future financial obligations.

Opt for Multiple, Smaller Policies

You can purchase more than one life insurance policy to cater to different needs. For instance, you could opt for a 30-year term policy to cover your spouse's financial needs until retirement and a 20-year policy to provide for your children's education.

Choose Between Term and Whole Life Insurance

Term life insurance covers a specific period, such as 10, 20, or 30 years, while whole life insurance lasts your entire life. Consider your future plans, such as buying a house or starting a family, when deciding between the two. Term life insurance may be suitable for covering specific needs like a mortgage, while whole life insurance can provide long-term coverage, including burial costs.

Seek Professional Advice

Discuss your life insurance needs with a financial advisor to gain personalized recommendations. They can guide you in determining the appropriate coverage amount and policy type based on your unique circumstances, goals, and budget.

In conclusion, determining the right amount of life insurance depends on various factors, including your income, financial obligations, family situation, and future goals. By carefully assessing these aspects and utilizing available tools and professional advice, you can ensure that your loved ones are adequately protected financially, even in your absence.

How much does life insurance cost?

The cost of life insurance is influenced by a variety of factors, including age, gender, health, and lifestyle choices. Let's break down these factors and how they impact the cost of life insurance:

Age

Age is a significant factor in determining life insurance rates. Younger individuals generally pay lower premiums than older people since younger people are less likely to have health problems and have a higher life expectancy. The cost of life insurance tends to increase as you get older, with rates peaking in mid-life before potentially decreasing again as the level of cover available reduces for older individuals.

Gender

Gender also plays a role in the cost of life insurance. Due to differences in life expectancy, women typically pay less than men for life insurance. On average, women in the US have a life expectancy of 79.3 years, while men's life expectancy is 73.5 years. This means that insurers consider men to be riskier to insure, leading to higher premiums.

Health

Your health is another critical factor in determining life insurance rates. Insurers will consider your height, weight, medical history, and any pre-existing conditions. Standard policies usually require a medical exam to assess your eligibility and determine the cost of the policy. The healthier you are, the more affordable your life insurance policy is likely to be.

Smoking Status

Smoking significantly impacts the cost of life insurance. Smokers typically pay higher rates than non-smokers due to the increased risk of developing various health issues associated with smoking, such as respiratory diseases and cancer.

Lifestyle Choices

Certain lifestyle choices and hobbies can also affect your life insurance rate. If you engage in risky activities like skydiving, racing, or other extreme sports, you may be subject to higher premiums. Similarly, if you have a hazardous or high-risk occupation, such as a police officer or a construction worker, your life insurance rates are likely to be higher.

Type of Policy

The type of life insurance policy you choose also affects the cost. Term life insurance, which provides coverage for a set number of years, is generally the most affordable option. On the other hand, permanent life insurance, which lasts a lifetime and includes a cash value component, tends to be more expensive.

Superannuation Funds

It's worth noting that life insurance can also be obtained through superannuation funds. Many super funds provide default life insurance coverage, known as death cover, which pays a lump sum to your beneficiaries in the event of your death. The cost of this type of life insurance is typically deducted directly from your super account balance, and the premiums tend to be cheaper than purchasing life insurance separately. However, the level of cover provided by super funds may not be sufficient for everyone, particularly those with higher insurance needs.

In conclusion, the cost of life insurance varies depending on a range of factors, and it's important to carefully consider your personal circumstances when choosing a policy. Comparing quotes from multiple insurers and understanding the different types of policies available can help you find the most suitable and affordable life insurance option.

What are the pros and cons of life insurance through super?

Life insurance through superannuation is a common option for many Australians, with almost 10 million superannuation accounts having insurance attached. While it can be a convenient and cost-effective option, there are several pros and cons to consider.

Pros

• Cost-effectiveness: Group insurance policies obtained through superannuation funds often come with reduced premiums compared to standalone policies. This is due to the collective buying power of the fund's members.
• Convenience: Life insurance within super offers a streamlined approach to managing your financial affairs. The premiums are automatically deducted from your super balance, eliminating the need for separate direct debits or payments.
• No impact on cash flow: Opting for life insurance inside your super can help you avoid a direct impact on your regular cash flow. Since premiums are deducted from your super account, you don't need to budget for them in your monthly expenses.
• Access to cover without health checks: Group insurance policies provided through super usually allow members to access insurance cover without undergoing extensive medical examinations or health checks. This can be advantageous for those with pre-existing health conditions or a history of medical issues.
• Default coverage: Many super funds automatically include a basic level of life insurance cover for their members. This ensures that even if you haven't actively selected an insurance option, you still have some level of protection.
• Benefit options: Upon death, many super funds allow certain beneficiaries, such as the spouse, to receive an income stream (within limits) to provide ongoing tax-effective income. In contrast, insurance held outside super generally pays out a single lump sum.
• Tax-effective: Depending on your marginal tax rate, paying for insurance through super can be more tax-effective than paying for it directly.

Cons

• Limited customisation: Group insurance policies within superannuation funds are often designed for a broad range of members, so the level of customisation available might be limited compared to standalone policies.
• Reduced super balance: Paying for life insurance through super reduces your retirement savings over time.
• Coverage gaps: If you switch jobs and change super funds, there might be a gap in your insurance coverage, leaving you vulnerable during the transition period.
• Lacking portability: Super funds often have restrictions on the portability of insurance cover. If you leave your current fund, you might not be able to take your insurance policy with you, requiring you to navigate the complexities of obtaining new coverage.
• Tax implications: Depending on your age and the type of insurance coverage, there could be tax implications when paying premiums and receiving benefits within your super.
• Limited cover: The level of cover you can get in super is often lower than what you can get outside super. Default insurance through super is not tailored to your specific circumstances, and some eligibility requirements may apply.
• Cover may end: If you change super funds, your contributions stop, or your super account becomes inactive; your cover may end, leaving you without insurance.

In conclusion, while life insurance through super can be a convenient and cost-effective option, it's important to carefully consider the pros and cons to ensure it meets your individual needs and circumstances.

How do I check my insurance through super?

To check what insurance you have through your super, you can:

• Call your super fund
• Access your super account online
• Check your super fund's annual statement and the Product Disclosure Statement (PDS)

Your super fund's website will have a PDS that explains who the insurer is, the details of the cover available, and the conditions to make a claim.

By checking your insurance through super, you'll be able to see:

• What type of insurance you have
• How much cover you have
• How much you're paying in premiums for the cover

If you have more than one super account, you may be paying premiums on multiple insurance policies. This will reduce your retirement savings, and you may not be able to claim on multiple policies. Consider whether you need more than one policy or whether you can get enough insurance through one super fund.

It's a good idea to review your insurance every 12 months, or after a big change in your life.

Frequently asked questions