Life Insurance: Inside Or Outside Your Superannuation?

When you take something for granted, you generally don’t give it much thought. A young person, starting out in their early working life, could easily feel this way about superannuation. Since retirement seems a long way off and other priorities are more pressing, superannuation and its associated benefits could be of little interest to a young employee. But what if something happens to prevent you from ever working again?

Superannuation and the insurance it provides becomes an important consideration — the cost and benefit of insurance has been an item of debate throughout the year. Of course, there are questions around how young somebody might be to pay life insurance or indeed whether someone quite senior needs to review their cover too.

But let me tell you about one case. I recently spoke with a family member about this very issue. Over time, his life has changed; he has married and had his first child. All of a sudden he has started to consider what would happen if he could no longer contribute to his family’s security. Now he is investigating whether he has sufficient life insurance cover through his superannuation fund.

Most superannuation funds offer three types of insurance for their members:

1. Death cover that pays a ­benefit to beneficiaries upon a member’s death; or a payment to the member if they are diagnosed with a terminal illness.

2. Total and permanent disability (TPD) cover that pays a benefit if the member becomes seriously disabled and unlikely to ever work again.

3. Income-protection cover that pays an income stream for a specified period if the member cannot work due to temporary disability or illness.

Most employer superannuation funds are required to offer their members a minimum level of life insurance based on the member’s age. Generally the member can increase, decrease, or cancel the insurance cover. But if members want to take out extra cover above the standard level through their superannuation fund, they may be required to undergo a medical examination.

The pros and cons

People sometimes wonder whether they should have insurance cover inside or outside of their superannuation fund. There are pros and cons with either scenario. The benefits in having insurance cover inside your super­annuation fund are:

• It is cheaper because most superannuation funds purchase insurance policies in bulk. Whereas, insurance cover outside of superannuation will depend on a person’s age, health, lifestyle and job risk.

• It is easy to manage because the insurance premiums are automatically deducted from the member’s super account.

• Some super funds automatically accept members for insurance cover without the requirement of a medical examination. This is because superannuation funds spread risk among their members.

• Members can choose the amount they will be covered for.

The disadvantages in having insurance cover inside superannuation are:

• The type of insurance and the level of cover are usually limited. Some insurers that provide cover within superannuation funds put caps on their levels of cover. If the cover is outside of superannuation, the levels of cover might be more flexible depending on the person’s age and health. Insurance coverage usually also ends when a member reaches the age of 65 or 70. Policies outside of superannuation may cover the person for longer.

• If the member moves to a different superannuation fund or ceases working for their employer, their cover may end.

• There may be delays in receiving benefits as the insurer first pays the benefit to the member’s superannuation fund, which then distributes it to the member’s beneficiaries.

• The insurance premiums are deducted from the member’s superannuation account so there is less money available for the member when they retire.

• Life insurance and TPD (total and permanent disability) insurance proceeds held outside of superannuation are paid to the member or their beneficiaries directly tax free.

• Most income-protection policies held inside superannuation provide for only two years’ worth of income protection.

About 80 per cent of superannuation members sign up for the default insurance cover with their employer superannuation fund.

Although it is cheaper, it may not be anywhere near what a person needs. Often life cover in superannuation is usually only for $100,000-$200,000 when in reality people may need closer to $500,000-$1 million to protect their family.

One option is for people to consider a second life-insurance or income-protection policy outside of their superannuation fund to cover the shortfall. I would recommend getting financial advice on this, though, to see if that is appropriate for your circumstances.

If you are considering switching superannuation funds, make sure you find out whether you will get the death, total permanent disability, or income-protection cover you want in the superannuation fund. You should also ask whether the new fund will allow you to transfer your current level of cover before you roll your superannuation savings into the new fund.

You will need to check the type of insurance cover, how much cover you have, and how much you are paying for the cover. Also check how you are classified for insurance. For example, if you have been classified as a smoker you may be paying more for your insurance than you need to, especially if you are not a smoker.

Unforeseen things happen. It’s wise to investigate early what is available to us that can give us some security if we can’t work any more. Superannuation is not just a savings scheme for a far-off retirement. Its insurance can also be of some help to those whose careers come to an unexpected end.

By Monica Rule

The Australian

07 November 2017

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