Superannuation: Life Insurance Coverage And Your Options

Life insurance is a crucial aspect of financial planning, providing peace of mind and ensuring loved ones are taken care of in the event of an individual's death or permanent disability. While the topic of death and disability may be uncomfortable, it is essential to consider the financial implications for dependents and family members left behind. This is where superannuation life insurance comes into play, offering a convenient and often cost-effective solution.

Superannuation, or 'super', is a significant component of retirement planning in Australia, and many super funds provide members with automatic life insurance cover, also known as 'death cover'. This means that by simply being a member of a super fund, individuals gain a basic level of financial protection without needing to arrange separate life insurance policies.

However, it is important to understand the specifics of superannuation life insurance, including eligibility requirements, coverage limits, and potential exclusions. Additionally, individuals should assess their unique circumstances to determine if the default cover provided by their super fund is sufficient or if additional external insurance is necessary.

What is covered by superannuation life insurance?

Life insurance through superannuation, also known as death cover, is a type of insurance that pays a lump sum to your beneficiaries if you pass away or are diagnosed with a terminal illness. It is a financial safety net that can help ease the financial stress of your loved ones in the event of your death.

Most super funds in Australia automatically provide their members with life insurance, also known as death cover. This is usually provided at a default rate, and the amount and cost of cover change as the member gets older. Members are typically eligible to receive basic cover automatically once they turn 25, their super balance reaches $6,000, and they have received an employer super contribution. The cost of the cover is deducted monthly from the member's super account.

In addition to life insurance, super funds may also offer total and permanent disability (TPD) insurance and income protection insurance. TPD insurance provides a lump sum benefit if the member becomes seriously disabled and is unlikely to work again. Income protection insurance, also known as salary continuance cover, provides a regular income for a specified period if the member cannot work due to temporary disability or illness.

It is important to note that the level of cover provided by super funds may be lower than what is available outside of superannuation. Members should review their insurance coverage and compare it with what is available outside super to find the right policy for their needs. They can do this by checking their super fund's annual statement and Product Disclosure Statement (PDS), or by contacting their super fund directly.

How much does it cost?

The cost of life insurance in superannuation in Australia depends on a variety of factors, including your age, sex, lifestyle choices, and the amount of insurance coverage you require. For example, men typically pay more than women for life insurance. Additionally, premiums tend to increase as you age, and certain lifestyle choices, such as smoking, can also impact the cost.

When it comes to age-based cover, the cost varies depending on your age, the amount of coverage, and your individual work rating. For instance, the cost for a basic level of death cover is typically deducted monthly from your super account, and this cost changes as you get older.

According to Canstar's research, the average monthly cost of a direct life insurance policy with a benefit of $500,000 for a non-smoking woman in her 30s is $29, while a non-smoking man in the same age group would pay approximately $39 per month, which is about 34% more for the same coverage.

It is worth noting that the type of cover, level of cover, and any applicable exclusions can also influence the cost of life insurance. Default insurance through superannuation may not be tailored to your specific circumstances, and there might be eligibility requirements to consider.

In addition to the cost of the insurance itself, it is important to be aware of any commission fees associated with purchasing life insurance through a broker or adviser, as these can be substantial and impact the advice you receive.

What are the pros and cons?

Pros of Life Insurance in Superannuation

Life insurance within superannuation offers several benefits, including:

• Cost-effectiveness: Group insurance policies obtained through superannuation funds often have reduced premiums compared to standalone policies due to the collective buying power of fund members.
• Convenience: Premiums are automatically deducted from the super balance, eliminating the need for separate payments and providing a streamlined approach to financial management.
• No impact on cash flow: Premiums are deducted from the super account, avoiding direct costs in monthly expenses and budgeting concerns.
• Access without health checks: Group insurance policies typically allow members to access cover without extensive medical examinations, benefiting 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, ensuring protection even if an insurance option hasn't been actively selected.
• Benefit options: Some super funds allow beneficiaries like spouses to receive an income stream (within limits) upon death, providing ongoing tax-effective income.

Cons of Life Insurance in Superannuation

However, there are also some considerations and potential drawbacks to having life insurance within superannuation:

• Limited customisation: Group insurance policies within superannuation may have limited customisation options compared to standalone policies, resulting in coverage that may not fully align with individual needs.
• Reduced super balance: Paying for life insurance through super reduces the super balance, potentially impacting retirement savings over time.
• Coverage gaps: Changing jobs and super funds can create gaps in insurance coverage, leaving individuals vulnerable during the transition period, especially with health conditions affecting new insurance eligibility.
• Lack of portability: Super funds often restrict the portability of insurance cover, making it challenging to retain the same policy when switching funds.
• Tax implications: Depending on age and coverage type, there may be tax consequences when paying premiums and receiving benefits within superannuation.
• Limited cover: The level of cover provided by super funds is often lower than that available outside superannuation, and default insurance may not be tailored to specific circumstances.
• Cover discontinuation: Switching super funds, stopping contributions, or having a low super account balance can lead to the discontinuation of insurance cover.

How do I check my superannuation life insurance?

If you're wondering how to check your superannuation life insurance, you're not alone. Many Australians are unaware that they hold insurance through their superannuation fund.

To find out what insurance you have in your superannuation fund, and who the insurer is, you can:

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

If you're with an Industry SuperFund, all you need to do is check your latest superannuation statement to see what your current cover is. If you want to alter it, simply call your fund and ask one of their consultants for a quote and any requirements associated with it.

If you're not sure whether you have insurance, or what type you have, it's a good idea to check your account. You can do this by logging into your account or the mobile app and selecting the insurance tab. You'll also be able to see how much you've paid for your cover by checking your transaction history.

How do I change my cover?

If you want to change your cover, the first step is to check your current insurance details. You can do this by logging into your account or the mobile app and selecting the insurance tab. Here, you will be able to view your insurance details and see how much you've paid for your cover by checking your transaction history.

Once you know your current cover details, you can decide what changes you need to make. This may involve increasing or decreasing your level of cover, changing your work rating, or adding or removing certain types of cover, such as death cover, total and permanent disablement (TPD) cover, or income protection cover.

To make changes to your cover, you can either log in to the Member Portal and go to the Insurance section, or download and fill out a form from your super fund's website. In some cases, you may need to provide additional information or undergo medical checks, especially if you are increasing your level of cover.

It's important to carefully consider your personal circumstances when making changes to your insurance cover. Factors such as your age, financial situation, health status, and whether you have dependents or other financial responsibilities should all be taken into account. You may also want to compare the cover offered by your super fund with what is available outside of super to ensure you are getting the most suitable and cost-effective cover for your needs.

Frequently asked questions