Most Australians wouldn’t dream of driving around in a car that’s not insured. Nor live in a house without insuring the building and contents to protect against damage or theft.
And yet, if you’re one of the Australians who has insurance in place that protects against an accident or illness that affects your ability to earn an income, you are in the minority.
Experts estimate only a third of the working population have income protection insurance. And, there’s a $1.8 trillion gap between current levels of insurance and the cover Australian families would need to maintain their quality of life until retirement if affected by death or disability.
Even for those who have life cover, the level of cover taken is rarely enough.*
Some people may not realise that the following insurances are provided through their super fund:
- Life insurance – pays a lump-sum benefit to dependants when the insured person dies. It aims to pay outstanding debts and cover ongoing living costs of dependants
- Total and Permanent Disability (TPD) insurance – provides a lump-sum benefit if the insured is totally and permanently disabled
- Income protection – provides insurance against loss of income when a person is unable to work and earn an income for a period of time due to illness or injury. This is thought by many people to be more important than life cover as people are more likely to have a substantial period off work than to die before retirement age.
However, it’s important also to realise that the default level of cover provided may not be specific to your needs and circumstances.
Here at IFS, we urge all members to review the level of cover provided through their super and adjust it, if necessary, to ensure the right level of cover is in place.
For example, younger members just starting out are less likely to have high debt levels or dependant children so may require a lower level of cover than older members with higher debt levels, such as a mortgage, and higher living costs, such as providing for a family and education expenses etc.
Members should take a proactive role in reviewing their insurances regularly to ensure their insurance cover changes as life changes.
Members may also opt to take out insurance separately through another provider outside of super but here are some of the benefits of insurance through super:
- Insurance premiums can be cheaper because the fund is purchasing group cover for all of its members rather than the higher costs that can apply to an individual policy with an insurer
- Premiums are deducted from your super balance so there is less impact on your income and cash flow
- Standard insurance is often provided without the need for evidence relating to your state of health (Additional cover may require medical tests so it’s best to get the right level of cover while you’re healthy.)
- You may opt to salary sacrifice the cost of the premiums, potentially delivering tax benefits.
However, there are some important factors you should also take into consideration:
- By taking insurance through your super fund, your super balance available for retirement is reduced by the cost of the insurance premiums
- If you are working on a casual or part-time basis, the fees for insurance may erode small super balances. The federal government is introducing changes next year to prevent this by requiring younger members, those with low balances and inactive accounts, to opt in to default insurance cover (rather than the current opt out)
- It may be more tax effective to obtain income protection outside of super as it is generally tax-deductible to the individual
- For life and TPD insurance, there may be tax consequences on payout to a beneficiary depending on their circumstances
- The standard or default level of insurance provided may not be sufficient for your needs, as discussed earlier. Check with your super fund whether you can apply for a higher level of cover, if needed
- Income protection benefits may cover only a certain percentage of your income and for a short length of time, for example two years. Again, check whether higher levels of cover are available through your fund if required
- Insurance through super doesn’t include trauma insurance or critical illness cover. This provides a lump sum to cover immediate medical expenses rather than just a percentage of income to meet existing expenses
- You may not be able to guarantee who the beneficiary of life insurance policies will be as this is ultimately at the discretion of the Trustee unless you make a binding death nomination.
Taking insurance inside or outside of your super is an individual choice and will come down to your individual needs and priorities.
We recommend that you consult your super fund, refer to the relevant product disclosure documents or speak with a financial adviser who would take into account your personal circumstances and advise you accordingly.
Industry Fund Services partners with several industry super funds to provide financial planning for their members. Visit us to see if your super fund has an IFS licensed planner.
This article is issued by Industry Fund Services ABN 54 007 016 195, AFSL 232514. It contains general information only and has been prepared without taking into account your objectives, financial situations or needs.
* Rice Warner, Underinsurance in Australia 2017.