Ask the expert: Working out the ideal insurance cover to have in superannuation
Knowing how much insurance you need can save you thousands while protecting your future.
But a quarter of superannuation fund members don’t even realise they receive life insurance through their super. And yet premiums continue being taken from their retirement savings to maintain the policy.
Rather than simply opting out of insurance, Industry Fund Services head of technical, research and advice Craig Sankey, said insurance can provide cover at great value.
The key is to find the ideal balance between appropriate levels of cover and a strong retirement savings pool – and it’s not as hard to do as many might think.
Understanding insurance in super
Super members have access to three different kinds of insurance through their fund: life insurance, total and permanent disability (TPD) insurance and income protection.
Life and TPD insurance are closely linked with one another, and Mr Sankey said it’s important to consider both of these in conjunction when weighing up your needs. This is because receiving a TPD payout can often reduce the amount paid out by a life insurance policy.
Income protection is less closely associated with the other two policies because of how and when it is used, but considering it as it relates to the other two is the most effective way to get good value.
While similar policies can be bought outside of super, for many members, the policies offered by their funds present better value as they are typically cheaper, and coverage is pre-approved up to a certain limit (though that limit varies from fund to fund).
Making extra contributions to super to cover the cost of premiums can also be a more tax-effective way to get insurance coverage, as those contributions are often taxed at lower rates.
How much insurance do I need?
Balancing your insurance needs with your retirement-income goals will likely require some compromise.
Mr Sankey said the most effective way to find this balance is to start by working out what coverage you would like if money were no object.
From here, members can scale back their coverage by cutting less important items until they arrive at an affordable premium.
Life insurance is typically used to pay off debts and provide dependants with income, meaning the amount you’ll need differs based on each person’s lifestyle.
The costs you’ll need to consider include funeral and estate fees (typically between $15,000 and $20,000), childcare and education costs for any children, and any outstanding debts you don’t want to leave your family.
It’s critical that you keep your beneficiary nominations up-to-date too, or the super trustees administering your estate could wind up paying out to the wrong people.
Total and permanent disability:
Mr Sankey said TPD coverage is a “hard one” to accurately gauge, because no-one can predict precisely what they’ll need.
“Will you lose your legs and need a wheelchair? Have you become blind? No-one can know,” he said.
“Generally an amount is allowed for that will include home renovations and one-off medical costs.
“We normally start with a figure of around $100,000, but how long is a piece of string? It’s really about how much someone feels comfortable with.”
Some funds will use a multiple of a family’s income as a guide to how much will be needed, Mr Sankey added.
This type of coverage is designed to replace the pay for people left temporarily unable to work; it doesn’t extend to people who lose their jobs.
Generally, members will only be able to cover 75 per cent of their income.
The two more important considerations are the length of the benefit and the waiting periods.
Members typically must be unable to work for 30 days before being able to claim on their insurance.
But, Mr Sankey noted those with plenty of accumulated leave can get cheaper premiums by extending the length of their waiting period.
The benefit period (that is, how long you’ll receive your replacement income) is ordinarily two years, but some funds now offer longer-term options.
In some cases, the benefit period can last up to age 67 – the most current Age Pension limit – though longer-term policies will cost more.
The type of work you do can also influence the size of premiums.
Mr Sankey said members should be particularly mindful of this, as funds catering to more dangerous employment might charge higher default premiums.
For example, white-collar workers with their money in a construction industry fund might be paying premiums for workers at higher risk of workplace injury. Changing their coverage could save them money.