Insurance in super, is it the best way to manage your risk?

Insurance in super, is it the best way to manage your risk? Taking out insurance is all about minimising financial risk, but is having your fund provide your insurance compulsory, or can you make a choice?

We look at what basic cover might include and some of the pros and cons of being insured through super. Many super funds offer basic insurance to you as a benefit of being a member. It is often difficult enough to decide which super fund to join, but understanding what insurance cover you need, and what you don’t need, adds yet another layer of complexity. It is a good idea to find out more about how you are covered and what that cover includes.

Depending upon your individual circumstances, you may not need the super funds default level of insurance that you are given automatically, or you may need more.

For instance, if you are in your early twenties and single, your insurance needs will probably be less than someone who is 45 and has a family.

Paying for insurance through super will reduce your super balance though, as premiums are deducted from your fund at source. The Insurance Superannuation Working Group reported recently that paying for unnecessary insurance premiums is eroding the savings of younger members “to the amount of up to $9,000 in some cases”. As a result, one particular super fund is offering ‘opt-in’ insurance to those under 25, and others may follow.

What type of insurance will your fund offer you?

Super funds insurance offering can be broken into three types of cover:

• Income protection (IP) insurance – this cover protects you if you are temporarily unable to work due to short-term illness or injury.
• Total and permanent disability (TPD) insurance – this cover will protect you if you suffer serious illness or disability and as a result are not able to work again.
• Life insurance (or death cover) – will protect your family/beneficiaries if you die in service; payment can be paid gradually over time or via a lump sum.

Benefits of your super fund providing your insurance

• Insurance premiums through super may be less than those outside. Super funds can get a discount on premiums due representing a number of people, under a ‘group’ policy and this discount will be passed on to you.
• Your insurance premiums through super will come out automatically without you having to manage the process.
• You may not require a health check before you are accepted for insurance within super.
• You should have a choice about the amount for which you are covered.

How about the disadvantages?

• You may be paying for insurance that you just don’t need.
• Paying insurance will reduce your super balance.
• The cover may be limited, eg minimum life insurance cover.
• You may not be able to move your insurance cover if you change your super fund or your employer’s contributions stop.
• Life insurance through super ends at retirement age (usually 65 or 70) and then you will need cover outside of super.

Who are your beneficiaries?

Should the unthinkable happen and those close to you need to make a claim, insurance that is paid out to dependants is tax free, whereas any pay-outs to non-dependants are subject to tax. If you do have life insurance and other cover, make sure you are clear to nominate your beneficiaries, those you most wish to benefit if you die in service.

What happens if you decide to consolidate or switch super funds?

If you are thinking of consolidating more than one super fund, or indeed switching funds, do check what this might mean in terms of your insurance cover. It might be possible for you to transfer the cover, but you need to know this first. Your situation may be more complicated if you are over the age of 60 or if you are suffering from a medical condition.

Opt-in life insurance?

It may be possible to avoid having to pay for life insurance through a super fund altogether in the future, as the new approach of funds offering insurance as an opt-in choice could become more widespread. However, if you take this route your decision needs to be weighed up carefully.

Insurance through super, is it the best way to hold insurance? Want to understand insurance options better?

Speak to us about your individual circumstances, what insurance you already have, and if it this is the right amount of cover for you. It is important that you review the insurance you have throughout your life, too, as your circumstances change.

Hunter Partners are Accountants, Tax Agents and Financial Planners. We can assist you with all aspect of your accounting, tax and financial planning requirements, call Hunter Partners on (07) 4723-1223.