If you’ve got super you probably have some life insurance included. It’s an easy way to get a basic level of cover, but is it enough to give you and your family true peace of mind?
More than 70% of Australians hold life insurance policies, more than 13.5 million separate policies, through their super funds.i Yet despite this, underinsurance remains a huge problem in Australia.
Rice Warner estimates that the median level of life cover in super meets only 60% of the basic needs for the average household and less for families with children. The position is even worse where total and permanent disability (TPD) and income protection cover are concerned. The median level of cover in super will provide just 13% of TPD needs and 17% of income protection needs.
Of course, some insurance is better than no insurance and insurance in super is convenient to set up and pay for. But it comes with a couple of points to be aware of and this is where professional advice is invaluable.
Firstly, a portion of your super is used to pay the insurance premium. This can help your cash flow if money is tight, but it also means you may not be contributing as much to your retirement savings as you thought.
It’s also worth keeping in mind that super funds offer standardised ‘off the shelf’ policies that may not suit your needs. This helps keep costs down, but that’s no consolation if your policy falls short when you need it most.
Because the insurer pays your super fund which then pays you, it may take longer to receive the money. What’s more, unless you make a binding nomination the fund trustees have the ultimate say in who receives benefits when you die. Your beneficiaries may also be taxed more heavily than they would if you held the insurance outside super.
A tailored solution
Your insurance needs are as individual as you are and should be reviewed regularly along with your other financial affairs. Whenever your circumstances change – if you marry, have a child, or buy a new home for instance – your life insurance should be reviewed.
It’s easy to underestimate what it would cost to ensure your family is able to maintain their current lifestyle, come what may. It’s important not to forget partners who don’t earn an income and may not necessarily have cover in their super, particularly where dependent children are involved.
Take the example of Mark, whose wife Suzy, 43, passed away suddenly after an illness. Thankfully, the couple had arranged a full suite of insurance cover in and outside their super. Mark claimed on Suzy’s life insurance which covered his mortgage, credit card and car loan repayments; it also allowed him to hire a part-time nanny to help with their two children.
Getting additional insurance outside super can be a little more expensive but you will have access to a wider range of policies that can be tailored to your individual needs. Some policies, such as Trauma insurance, can only be bought outside super.
Even if you have some level of cover inside super, it’s important to do your sums to work out exactly how much your family would need to maintain your current lifestyle if you or your partner were to die or become seriously ill. It may take a little time, but with so much at stake guestimates won’t do and we will be only too happy to assist.
i Ricewarner, Insurance through superannuation, 20 April 2016.