Insurance inside super, can you count on it? We hear the statement “I have that insurance inside my super” often. But do you really know what you are covered for?
Most super funds will offer a level of insurance cover. Broadly speaking, when it comes to personal insurance, there are 4 main types of cover:
- Death (sometimes called Life insurance, but we prefer the term Death cover for simplicity as Life insurance can also be used to talk about ALL personal insurance).
- Total and Permanent Disablement (sometimes called TPD insurance).
- Trauma (sometimes called Critical Illness).
- Income Protection (sometimes called Temporary Disablement, or Illness & Accident).
Already it’s getting a little more complicated. Now, do you know which of these types of insurance you can hold inside your super fund? All except, for Trauma insurance. You see, one of the complications of holding insurance inside super is that to access the benefit, you need to meet what is termed a ‘Condition of Release’. Unfortunately, Trauma insurance does not meet such a condition, and so many people do not even realise they don’t hold this cover.
What are the benefits of holding your insurance via super?
- Often the cover is cheaper (because the policies are purchased by the super fund in ‘bulk’).
- You don’t have to fund the premium yourself, which can help your hip pocket.
- You will often get a ‘default’ level of cover, which means you don’t have to do the legwork. In addition, this ‘default’ cover often does not require any paperwork or medical checks.
What are the disadvantages of holding your insurance via super?
- You may not have all the cover you need. We have already addressed that Trauma insurance is not available, but in addition, the ‘default’ level of cover does not take into account your situation or needs, so may not be the right level of insurance for you.
- You risk losing your insurance if your situation changes. Often super funds will have minimum account balances that are required to keep the cover, and you may also have to pay contributions to the fund to ensure the continuation of the insurance. What happens if you change employment? You may be likely to lose your cover.
- The net benefit paid may be lower than holding a personally owned policy. Tax must be factored in when considering insurance via super, and this can often mean a significant dent in the amount that is paid out, especially if the funds are paid to a non-tax dependent.
- The process of receiving funds may be longer than holding a personally owned policy. Now, instead of going directly to the insurer, you have added an intermediary (the super fund) in the middle. This can mean timeframes are increased to receive a claim, with many super funds indicating a 3-6 month timeframe being needed as a minimum.
- Your super balance is reduced. Unless you are opting to make additional super contributions (in which case – why not consider getting personally held cover and funding directly?) the premiums will be deducted from the balance of your super fund. This could make a significant dent on your retirement savings (even more so if you have ‘stepped’ premiums that increase in cost every year).
- The cover may not be as comprehensive as personally owned insurance. Remember, the super fund often won’t ask you to fill out any paperwork or provide health details. You may be putting yourself at risk if you have had any health events that may mean the insurer is unwilling to pay out the claim. In addition, because the cover was purchased in ‘bulk’, the product may be of lower quality than a policy held directly with the insurer. As the old adage goes, you get what you pay for.
- Death cover may cancel before you can claim on it! Many death cover policies will end at around age 65-70 when held via super. Policies held personally can continue considerably longer (depending on the product). Will you have cover by the time you need it?
- When you pass, who will receive your insurance benefit? With death cover held via super, you must also elect a beneficiary (on your super fund), with that beneficiary being the recipient of your insurance cover on your passing.
While you may be Super Insured, bear in mind that it’s not that Super Simple. If you are considering Life insurance, have a chat with a professional who can determine the right ownership and cover for your situation and needs.
Teneale Laister CFP Professional, BCom(Fin,FP,Mgt), ADFS(FP), is a representative of Alman Partners Pty Ltd, Australian Financial Services Licence No: 222107.
Alman Partners, nor it’s representatives, make no opinion on the subject matter or the subjects of the original articles. The case presented is for illustrative purposes only, and we encourage readers to form their own opinion on the matter.
Note: This material is provided for information only. No account has been taken of the objectives, financial situation or needs of any particular person or entity. Accordingly, to the extent that this material may constitute general financial product advice, investors should, before acting on the advice, consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation and needs. This is not an offer or recommendation to buy or sell securities or other financial products, nor a solicitation for deposits or other business, whether directly or indirectly.