Paul Sanchez
Insurance through superannuation is a topic that many Australians are unaware of, but it is an important consideration when planning for the future. Most super funds offer default insurance, which covers life, total and permanent disability (TPD), and income protection. While this can provide peace of mind, it is essential to understand the terms and conditions, as the cover may not be tailored to your specific needs and could reduce your super balance over time. The suitability of insurance through super depends on individual circumstances, and it may be necessary to seek additional cover outside of super to ensure adequate protection.
| Characteristics | Values |
|---|---|
| Number of people insured through super | Almost 10 million Australians |
| Advantages | No need for health checks, tax-effective payments, increased cover, fewer health checks |
| Disadvantages | Limited cover, reduced retirement savings, multiple insurance policies, loading on premiums |
| Types of insurance | Life cover, TPD insurance, income protection insurance |
| Payout likelihood | Higher for insurance through super |
| Default cover | Provided to eligible members aged 25 and above with an account balance of $6,000 |
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What You'll Learn
Income protection insurance
Most super funds offer income protection insurance as part of a default insurance package, which means it is not tailored to any member's particular circumstances. This insurance is typically available without medical checks and is for a specified amount. The cost of the insurance is deducted from your super balance, reducing your retirement savings. However, premiums are often cheaper as the super fund buys insurance policies in bulk.
When deciding between super-based or direct income protection insurance, it is important to consider the unique features of each policy. Super-based income protection insurance offers convenience and potentially lower premiums due to group policy pricing, while direct income protection insurance provides more control, customisation options, and potentially tax-deductible premiums.
Arranging income protection insurance directly with an insurer may give you greater control over your policy, allowing you to select your insurer, benefit amount, and other features to match your circumstances. It is worth taking the time to understand your personal situation and needs, such as whether you have dependents, a mortgage, or other debts, to determine the best choice for you.
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Life insurance
There are several advantages to life insurance through a super fund. Firstly, premiums are often cheaper as the super fund buys insurance policies in bulk. Secondly, insurance premiums are automatically deducted from your super balance, making it easy to pay. Thirdly, most super funds will accept you for a default level of cover without health checks, which can be useful if you have health conditions that make it difficult to get insurance outside of super.
However, there are also some disadvantages to consider. Firstly, the level of cover provided by life insurance within a super fund may be limited and might not meet all your needs. Secondly, the premiums are paid from your super balance, which reduces your savings for retirement. Additionally, there may be issues with the distribution of death proceeds if there are no binding beneficiary nominations, as the super fund trustees have discretion over how the funds are distributed. Lastly, the payout likelihood for insurance through super may be lower than that of direct insurance, and there may be longer wait times for receiving payments.
Ultimately, the decision to opt for life insurance through a super fund or directly from an insurer depends on your individual circumstances and needs. It is recommended to review your insurance needs regularly and consider scheduling an insurance review to ensure your coverage is adequate for your situation.
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$14.99
Total and permanent disability (TPD) insurance
When considering TPD insurance, it is important to read the relevant Product Disclosure Statement (PDS) to understand the inclusions and exclusions, and the insurer's definition of total and permanent disability. The PDS will outline whether the policy covers "any occupation" or just your "own occupation". "Any occupation" means that you are unable to work in any job suited to your education, training, or experience, while "own occupation" covers your inability to work in your specific job. "Own occupation" cover is typically more expensive and may only be available outside of superannuation funds.
Superannuation funds often provide default TPD cover, which is cheaper than buying it directly. However, the level of cover may be lower than what is available outside of super. It is worth noting that insurance premiums paid through super will reduce your retirement savings. Additionally, if you have multiple super funds, you may be paying premiums on multiple insurance policies, further reducing your super balance. Therefore, it is essential to review your insurance coverage and consider consolidating your super funds if necessary.
When deciding if TPD insurance is worth it, individuals should consider their personal circumstances, financial obligations, and the likelihood of needing this type of coverage. It is recommended to seek advice from a financial adviser to ensure you have the right level of cover for your needs.
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Default cover
Firstly, default cover is not tailored to an individual's specific circumstances. The level of cover provided may be lower than what is actually needed, and it may not cover all types of occupations or health conditions. Additionally, default cover may end or be lost if certain conditions are not met, such as changing super funds, stopping contributions, or having an inactive super account. It is important to regularly review the terms and conditions of default cover, as they can change over time.
Another factor to consider is the impact of default cover on retirement savings. Insurance premiums are typically deducted from the super balance, reducing the amount available for retirement. It is worth noting that default cover premiums may also increase over time. Therefore, it is crucial to assess whether the level of cover provided is sufficient and whether additional cover is needed.
While default cover can provide a basic level of protection, it may not be enough for everyone. Individuals should carefully consider their personal situation, such as their age, health, occupation, and financial responsibilities, to determine if default cover meets their needs. If not, they can choose to opt out, reduce, or cancel their default cover and explore other insurance options.
In conclusion, default cover through superannuation can be a convenient and cost-effective way to obtain basic insurance protection. However, individuals should carefully review the terms, conditions, and limitations of their specific default cover to ensure it aligns with their unique circumstances and requirements. Seeking financial advice or comparing different insurance options can help individuals make informed decisions about their insurance choices.
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Pros and cons
Pros
Insurance through superannuation can be a valuable safety net for you and your family. It can protect your income and your loved ones in case of sickness, injury, or death. Most super funds offer life and total and permanent disability (TPD) insurance, and some also offer income protection insurance. This insurance is typically provided at a default level without health checks, which can be useful if you have pre-existing health conditions or work in a high-risk job. The premiums are generally lower as the fund buys the insurance cover in bulk, and they are paid from your super balance, which is taxed at 15%. This can be a tax-effective strategy if your marginal tax rate is greater than 15%.
Cons
The level of cover provided by super funds may not be sufficient for your needs, especially if you work in a high-risk job or have significant financial obligations. The cover may also not be tailored to your particular circumstances, and it may reduce your retirement savings, especially if you have multiple super accounts with multiple insurance policies. Additionally, life insurance cover in super decreases over time and reaches zero by the age of 70, while TPD cover ceases at 65. Changes to the law mean that insurance is no longer automatically provided to new super fund members under 25 or with balances under $6,000. If your super account is inactive for 16 months, you must indicate that you want to continue the insurance, or it will be cancelled.
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Frequently asked questions
Insurance on super can help protect your income and your loved ones. It can be a valuable tool in your and your family’s life when you need it the most. It can also be tax-effective as your employer's super contributions and salary sacrifice contributions are taxed at 15%, which is lower than the marginal tax rate for most people.
Insurance premiums are deducted from your super balance, reducing your savings for retirement. The level of cover you can get in super is often lower than the cover you can get outside of super. Also, life insurance cover in super reduces over time and reaches zero by the time you are 70.
Super funds typically offer three types of insurance: life cover, TPD insurance, and income protection insurance.
Many Australians are not aware they hold insurance through their super fund. You can check your super fund's website or your annual statement to see if you have insurance and who the insurer is.
There is no right or wrong answer to this question. It depends on your personal needs and circumstances. You can use tools like ASIC’s Moneysmart’s life insurance needs calculator to help you decide.
