Just how well covered are you?
Life insurance is an automatic feature of most super funds, and that’s a good thing because it gives many working Australians life cover that they may not otherwise take out.
In fact, around eight out of ten super fund members have personal insurances like life cover or income protection insurance through their super.
On the plus side, organising insurance through your super is very cost-effective. The premiums are low because the fund arranges ‘group’ cover, which works like bulk buying. The downside is that fund trustees don’t know your personal circumstances. So the insurance you have is not specifically tailored to your needs, and this can have significant drawbacks.
You may not have enough cover for your needs
To begin with, you may not have sufficient insurance in place to protect your family from financial hardship.
Life cover held in super is usually only worth $100,000 or $200,0001. If you add up your financial commitments including a home loan, as well as the future needs of loved ones, it’s highly likely you could need considerably more cover.
Be mindful too, that the trustee of your super fund has discretion over who your life insurance is paid to. The payout is not guaranteed to go to the person of your choosing. The only way around this is to complete a binding death nomination that specifies exactly who you want to receive the money.
Income protection – how long will it last?
It also pays to know exactly how the insurance your fund offers will work in your circumstances. For example, income protection insurance is essential. It pays a regular income usually worth around 75% of your normal wage or salary if you can’t work due to illness or injury – and remember, health insurance will pay some of your medical bills but that’s all. It won’t offer protection if you get sick and can’t work.
The trouble is, income insurance organised through super normally only runs for two years. If you fall seriously ill or an injury leaves you unable to work for many years, you’re going to need cover that lasts a lot longer.
Read the fine print
Worryingly, fund trustees are not obliged to provide insured benefits to all members on the same basis. In March 2017, for instance, media reports emerged of workers who’d had total and permanent disability claims rejected because they were casual not permanent employees.
The bottom line is that you can be knocked back at claim time. And when that happens, don’t expect to be refunded the premiums you have been paying, potentially over many years.
Having personal insurance through a super fund is a good idea but it pays to read the fine print of your policy. If something goes wrong, your low-cost, low-fuss cover can quickly prove to be false economy.
With so much at stake, it is worth speaking with your financial adviser to know exactly what you are – and are not – covered for.