As well as superannuation, most super funds also offer their members some important insurance options. They’re designed to give members peace of mind should something unexpected happen.
The three most common types of insurance in superannuation are:
- Life insurance which can help provide for your loved ones if you die. Life insurance is usually referred to as death cover by super funds.
- Total and permanent disability insurance (TPD) which can replace your income if you’re injured and can’t ever work again.
- Income protection insurance which can pay up to 75% of your income if an injury or illness results in you not working for a period of time.
Often, funds will combine death cover with TPD cover and provide it as default cover as part of your membership, whereas you are usually required to apply for income protection cover.
If you’re under 25, be aware that from 1 April 2020 you are no longer provided with automatic insurance cover. If you want to be covered, you will need to apply to your fund for cover. However, there are exceptions to this rule for those who are considered to be working in dangerous occupations. Super funds are also prohibited from automatically providing insurance cover for low balance members until their super account has a balance of $6,000. Existing members who had a balance of $6,000 or over at any time from 1 November 2019 to 1 April 2020 are excluded from this prohibition. However, it is important to remember that you must leave sufficient funds in your super account to pay for your insurance premiums.
Why having insurance in super makes sense
Buying death, TPD and income protection insurance cover through your super fund is often a lot cheaper than if you were to obtain it as an individual.
Superannuation funds have enormous buying power and can purchase ‘in bulk’, which means they can generally negotiate better premiums and pass the savings on to members. What’s more, Industry SuperFunds don’t pay commissions to advisers for selling insurance and can pass this saving on as well.
Most super funds are able to negotiate with their insurer to obtain insurance cover for their members regardless of individual members' current state of health. So even if you’re in poor health you can generally still receive automatic base level cover at premium rates negotiated by your super fund with their insurer.
There’s also no fear of forgetting a payment (potentially leaving you without cover) since funds automatically deduct the premium from your super.
Finally, super fund insurance premiums effectively attract a tax deduction for the fund that should then be passed back to you in the form of lower premiums.
If your superannuation balance doesn’t cover the cost of the insurance premium you can always add extra to your super to offset this cost.
Tailor your insurance to meet your needs
Like any insurance, it’s important to make sure the insurance you have through your super will cover your needs (and/or those of your family) if misfortune strikes. Similarly, you don’t want to be paying for cover you’re not likely to need. That’s why it’s wise to check your cover and make sure it’s adequate and relevant.
When assessing your cover, you should consider the following:
- The level of default cover may not be enough to provide for all of your needs.
- You may need to increase your life cover if you have children or other dependants
- If you don’t have dependants, then you might want to cancel the death cover component, but keep your TPD insurance.
- Income protection insurance is a wise choice if you are self-employed, a contractor or have a mortgage.
- Your level of cover does not automatically update if you get a pay-rise, have children or take out a loan. Whenever your life changes, you should consider updating your insurance cover.
- Premiums are deducted from your account. This means there is less in your super account and less opportunity for it to grow over time and this will impact your final balance at retirement.
Working out your cover
Your most recent superannuation statement should detail the type and extent of any insurance you have with your fund. If you can’t find it or you’re still not sure, just call your fund and they’ll be happy to answer your questions.
Once you’ve worked out your level of insurance cover, check to see if you have any insurance cover elsewhere, and add that into your calculations. You may find that you’re doubling up if two policies cover the same thing. If so, you might want to consider consolidating your insurance – but first, make sure:
- You’re allowed to increase the cover of the policy you’re consolidating into
- There are no financial penalties for cancelling a policy
- You are aware of any rules regarding pre-existing medical conditions
And remember, the amount of cover required differs from person to person and is based on various factors including, your age and your life circumstances, the amount of debt you have, if you have any dependants, their age, and of course, how much you’re earning currently.