Life insurance in superannuation can cost the average person hundreds or even thousands of dollars a year, and its costs can reduce overall retirement balances by tens of thousands of dollars.
Whether you realise it or not, you are probably paying for a life insurance policy through your superannuation fund. Which means all of us should be asking ‘is it worth it?’
The answer for some people is ‘no’ but before you act rashly and cancel your policy you should look carefully at your circumstances. Paying premiums when you are young and without commitments is unnecessary for many people but leaving yourself underinsured as you age can be a disaster.
“It’s a life stages thing,” said Marc Bineham, president of the Association of Financial Advisors. “A young couple, who both work and don’t have a mortgage are not really going to need life insurance.
“But when they get a mortgage, have a child and one takes time off from work for child rearing it’s critical to have cover in case something happens to the breadwinner.”
Insurance cover needs to be managed and thought about during the life cycle and it can be worth taking on extra cover despite the cost.
For people with commitments “it is worthwhile paying somewhere between 1 and 3 per cent of your income in insurance premiums to get adequate cover,” said Ben Marshan, policy head with the Financial Planning Association of Australia.
“It might seem difficult but protecting yourself and your family comes at a cost.”
Getting extra cover has its advantages. Mr Bineham described the situation of a 25-year-old client with terminal cancer whose employer had given him more than default cover.
“He has a claim for $300,000 which will cover his mortgage in Sydney. Relying on the default policy level he might have got $80,000,” Mr Bineham said.
For most people, insurance in superannuation means relying on the default level offered in MySuper or other standard super arrangements.
“Around 80 per cent of people have default level cover,” Mr Bineham said.
“That makes them underinsured. While they mightn’t get a lot, it’s better than zero.”
However, the level of underinsurance is quite stark, according to research house Rice Warner. They say adequate insurance levels look like this.
However “for those who have life cover, the median cover level is estimated to be approximately $143,500, which is only twice the median household income”, Rice Warner said. That is well below what is needed for basic life cover for all but the 60-plus cohort.
Managing your insurance through the life cycle is important because it could also give you more cash to invest in super or pay down your mortgage towards your retirement.
“Once the kids are off your hands, you’ve paid down the mortgage and your house has risen in value you can reduce or drop your insurance because you are essentially insuring yourself,” Mr Bineham said.
Super funds are increasingly catering to the changing needs of insurance through the life cycle. From March 1, HESTA will tailor premiums to the age of members, resulting in a reduction of premiums for younger people while costs will rise for older people.
The cost reduction for younger people will also be enhanced by reducing the level of cover they receive, which in turn also results in lower premiums.
AustralianSuper will, from November this year, provide opt-in arrangements for those under 25 to make it easier for young people who don’t need insurance to drop their cover.
Alex Collie, an insurance and health specialist from Monash University, said: “Without insurance in super, many working Australians would be left without an adequate income safety net in ill health as social security benefits are limited and workers compensation only available for conditions directly related to employment.”