Social
While 8 million out of the approximately 15 million Australians who hold superannuation accounts are covered by some form of life insurance within their superannuation, underinsurance is more common in Australia than you might think.
A response often heard when asked about life insurance is, “I have insurance in my superannuation fund. I’ll be fine, and so will my family”. This response could signal a lack of clarity about what appropriate levels of coverage that life, TPD, income protection, and trauma cover look like for their personal circumstances. Understanding this seems even more important when we consider that 1 in 4 Australians will experience a loss in earnings due to disability or illness in their lifetime. To help, Tyler Scarce shares five key insights about life insurance products that are built into retail, industry, and corporate superannuation funds.
When a new retail or industry superannuation fund is opened, default levels of Life, TPD, and Income Protection (Salary Continuance) are applied. These levels are standardised and do not consider the member’s personal or financial objectives, as shown in the following example:
For Income Protection, a $3,000 gross monthly benefit is a common default sum provided in a superannuation account. This reflects a gross annual income of $48,000 so if you are earning over $48,000, the sum insured is not appropriate for your circumstances*. The maximum income protection coverage for a policy is between 70% to 85% of your annual income. This means if you have the maximum level of cover and you make a claim, you will still receive a significant pay cut.
*This standardised sum insured does not consider the member’s household income, debt, or education expenses that would otherwise be factored into a Life Insurance calculation (Basic Needs Analysis).
Because of these standardised levels of cover, it is likely that many Australians are unknowingly underinsured. Achieving an appropriate level of life insurance will depend on an individual’s financial position, financial dependents, and their objectives. While everyone’s circumstances are different, the basic needs calculator is a useful tool to help you understand your risk exposures.
Sum insured = Mortgage + Debt + Planned Education Costs + Multiple years of income replacement
In some cases, large companies have their own corporate superannuation funds, such as Telstra Super or BHP. The funds are great for existing staff, with economies of scale providing competitive insurance premiums and investment fees. However, if you leave the company, you will be moved from the employee fund to a personal (public, past employee) fund with a similar name, but without the same entitlements and significantly higher costs.
The most common misconception we face within the life insurance industry is that just because your superannuation (retirement funds) is with the fund, you do not have to hold insurance within the fund. Most people are unaware that their superannuation fund can be used as the mechanism to pay for Life, TPD, and Income Protection through a specialised insurance company.
Life insurance products provided by specialised insurance companies have guaranteed renewability, meaning product definitions do not change. The life insured and insurance company enters a legal contract on the inception date, so there is no reduction in benefits for the life of the policy. By comparison, superannuation funds can change policy wording or definitions for an insurance product held within their fund.
Prior to April 2020, if you held insurance within your superannuation fund, the insurance would be maintained unless cancelled. Regulatory changes have since been introduced, aiming to prevent inactive super funds from being eroded by insurance premiums. Superannuation funds that have not had a personal or employer contribution in 16 months, or the member has not opted in to retain the insurance will have their insurance cancelled. If you have multiple superannuation funds, it is likely that the insurances are gone, unless you ‘opted in’ to the insurances.
Insurance within retail, corporate, and industry superannuation funds serves a purpose, but the default settings of these funds are unlikely to meet your personal or financial objectives. This means it is important to understand your personal risk exposures and find the right solutions to address them.
We offer an obligation-free review of your current life insurance portfolio, including default insurances within your superannuation fund.
Feel free to reach out to discuss your options at any time.
Risk Adviser
Honan Insurance Group Pty Ltd (Honan) (Australian Financial Services Licence no. 246749, ABN 67 005 372 396) is an insurance broker acting as agent for insureds and intending insureds. Honan is not an insurer. The information in these articles are current as at the date of first publication and have been prepared without taking into account your objectives, financial situation or needs. Any advice provided in these articles is of a general nature only. Any statements concerning tax, accounting or legal matters are based solely on Honan’s experience as an insurance broker and are not to be relied upon as accounting, tax or legal advice. Before making a decision to purchase an insurance policy, please read the relevant Product Disclosure Statement to make sure the policy is right for you. Insurance cover is subject to policy terms and conditions including policy limits and exclusions.
