- October 28, 2021
Should I Take Out Life Insurance in my Super?
- by Michael Smith
Life insurance is an important wealth protection tool, but is it in your best interests to take out cover through your super fund?
We often take out insurance for our everyday possessions including our car, home and contents, not to mention, for certain activities like travel and business operations. In fact, many of us are used to taking out health insurance, which also brings with it potential tax benefits for certain individuals.
All of these policies are designed to give us peace of mind with respect to financial protection against unforeseen events. We make every effort to ensure that neither we nor our loved ones are left with a financial burden when it comes to day-to-day concerns, but the same cannot be said for life insurance. All too often, life insurance is a second thought, and by then, it may be too late.
There are a number of ways in which life insurance can help you and your loved ones, so here is everything you need to know.
Why do I need life insurance?
Sometimes when we least expect it, things can go wrong. That in itself shouldn’t come as a surprise to anyone, but when an unfortunate event does happen, it is important to be protected. Life insurance is one way to provide protection against the financial impact of an unfortunate event such as injury, illness and death, either minimising or eliminating the financial burden for you or your family.
In our experience, all too many Australians are underinsured when it comes to life insurance cover. Whether it be a policy that offers insufficient cover, features strict exclusions or inappropriate coverage, it is important to ensure that you and your family are financially protected when you are likely to need it most. This means not only having cover for expenses in the immediate aftermath of an injury, illness or death, but assistance maintaining a standard of living thereafter.
Many of us struggle with the notion of maintaining an emergency fund for unexpected expenses. Without adequate insurance, you run the risk of being left to pay thousands in expenses that you may not have the money for. This means you could face the prospect of going into debt and potentially being forced to sell assets, including the family home, just to support yourself or care for a loved one.
What’s more, if you are the main or sole provider for your family, the importance of life insurance becomes even more critical. Will your partner have the means to support the family and pay existing debts if something were to happen to you that left you unable to work, let alone terminally ill or leading to you passing away? This is why you should consider the type and extent of personal insurance cover you have
What type of insurance do I need?
While life insurance is the prominent focus of this article, it is also important to be aware of other forms of personal insurance. After all, these different forms of insurance come together to form a comprehensive wealth protection strategy, and it is often beneficial for individuals to have different types of insurance cover to offer protection against different types of events.
Back to life insurance, which is sometimes referred to as death cover, this type of insurance is designed to offer financial protection in the event you pass away or become terminally ill. If either of these events occur, a lump-sum payment may be made to your nominated beneficiaries. This type of super may be taken out through your super fund, or it may be held outside your super, which we’ll touch on shortly.
Meanwhile, total and permanent disability cover, referred to as TPD cover, insures against events that leave you totally and permanently disabled. As is the case with life insurance cover, you can take this out through either your super fund or external to your super, and a lump-sum payment may be received by your beneficiaries. The purpose of this cover is to help provide financial assistance in meeting ongoing medical expenses, lost income and any modifications to the family home that improve your standard of living while disabled. TPD is regularly bundled with life insurance cover.
One form of insurance that individuals often neglect is income protection. This type of cover is designed to help you substitute part or all of your standard income in the event you are unable to work due to an injury or illness. It offers monthly payments based on at least a proportion of your gross income for a specified period of time, and may be owned either inside or outside your super.
Among the other major insurance types, trauma insurance is another area for consideration. Sometimes referred to as critical illness cover, this type of insurance pays a lump sum in the event you suffer a critical illness or serious injury, including the likes of a stroke, cancer or major head injury. New trauma insurance policies are not offered through superannuation funds, however, externally you can take out cover on its own or packaged with life and TPD cover.
Do you already have cover?
By now, if you’re worried about the fact that you might not have a life insurance policy, don’t stress just yet. The good thing is, you may already have some cover through your superannuation fund. When you first joined your super fund, you would have been given the option to consider whether you would like to take out life and TPD insurance through your fund.
Generally, super members will be offered varying levels of cover, from a ‘standard’ amount, to ‘half-standard’ cover, or ‘tailored’ cover. In the case of standard cover, this will be based on a risk assessment tied to your age, while premiums will take into account your profession and smoking status, among other potential items.
Perhaps you have no recollection of whether you took out life insurance through your super when you first joined, but fortunately it is easy to find out. Sign into your super account and work through the prompts to see whether you have insurance cover. Alternatively, contact your super fund and they can fill you in.
One thing to note is that as of July 2019, government regulations require life insurance cover for inactive super members to be cancelled where no contribution has been made in 16 months. Similarly, insurance will not be provided to new super fund members aged under 25, or where your account balance is under $6000, unless specifically requested.
What’s more, even if you have cover through your super, the question to consider is whether this is sufficient and appropriate to your
circumstances. Default coverage is unlikely to take into account factors relating to your family, living arrangements, debts and the like, so the best thing to do is speak to a licensed professional, including us.
Where should I hold insurance cover?
- Given the volume of members in your super fund, you may be able to access more affordable premiums for standard cover as super funds ‘pool’ insurance cover
- Payments for your premiums are deducted directly from your super account, freeing up cash flow in your day-to-day life, and also relieving any worries about making regular payments
- While cover might not always be sufficient, it is easy to increase cover above default levels, subject to medical examination and assessment
- You are less likely to require a health check for standard life cover, which can be beneficial for those with certain health conditions or working in a high-risk job
- Employer super contributions and salary sacrifice contributions are taxed at 15%, which is lower than the marginal tax rate for most people, and this can make it tax-effective to pay insurance through your super
- Meanwhile, you should also take into consideration some of the potential issues in holding life insurance through your super fund. These include but are not limited to:
- As the cost of premiums are deducted from your super account, this will weigh on the growth of your retirement money, and potentially impact your lifestyle and retirement benefits later in life
- Super funds offer standard levels of insurance cover that take into account a limited set of your personal circumstances, which means that the level of cover may be inappropriate for your personal needs
- Trauma cover is only available as a stand-alone policy for those seeking a new policy, which means if you wish to bundle it with life and TPD cover you will be limited to external cover
- When compared with stand-alone policies, life insurance held through your super generally comes with a longer waiting period before you can claim on any eligible payouts
- Insurance benefits through your super will be subject to a condition of release
- If you change super funds, your contributions stop or your super account becomes inactive, this may lead to your cover ceasing and leaving you without life insurance protection
Final takeaway
Life insurance is a vital tool with which you can financially protect yourself and your family in the event of an unforeseen incident. It is one of several forms of insurance that can go a long way in providing peace of mind to maintain you and your family’s lifestyle, while also protecting your wealth.
The decision on whether to take out life insurance through your super or via a stand-alone policy comes down to a number of factors. Not only should you consider what is and isn’t covered, but you should familiarise yourself with the terms and conditions of each policy on offer. On top of that, both options come with their own advantages and disadvantages, so it may well come down to a case of what matters to you most. Regardless, it pays to speak with a licensed professional who can offer detailed advice to suit your personal needs.
