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Life insurance inside super: Keep it or bin it?

AUFLI - Life insurance inside super Keep it or bin it

Here's why I cancelled the life insurance inside my super and found an alternative that can actually save me money.

Unless you've called or cancelled online, you're probably paying for life insurance through your super. And it might end up costing you a lot more than you think, to the tune of tens of thousands of dollars (more on that here).

That's because when you get super in Australia, you automatically start paying life insurance – so long as you're 25 and have an account balance of $6,000 or over.

The fee (premium) you pay is deducted from your super. In return, your family can receive a payout of around $150,000-$200,000 when you die – but usually only if you die before you're 65.

Yes, you read that right. Unless you die before the not very ripe old age of 65 (or in some cases 70), you'll have been taking money out of your super every month in return for nothing.

So should you bin it?

I did, and here's why.

I'm currently 27, rent in Sydney's inner west, and don't have any kids (yet) relying on me to provide for them.

I opened my super account with Commbank when I moved to Australia in 2018. My insurance premium was $13 a month and the payout benefit was $150,000.

How much it can actually cost you

$13 a month might not sound like a lot, but when it's coming out of your super, the true cost can be staggering. If that $13 was instead invested into your super each month, it would be worth over $40,000 after 40 years (based on an average annual return of 8.2%).

I didn't cancel my super life insurance until the end of 2020. Luckily, I'd only been paying premiums for 2 years, so it wasn't a huge hit – in total, it was around $300.

If you've been paying premiums towards your super life insurance for a lot longer, you'll have paid a lot more, so you may be more reluctant to pull the plug on your cover, which is very understandable.

For example, if you've held your super for 10 years, you've probably paid around $2,000 out of it for insurance.

You can work out how much you've paid in premiums by checking your super statement. To get a rough idea though, you can do this quick calculation:

$15 (a typical premium price) x (12 x the number of years you've held your super account)

Based on this calculation, at the very least I'll save $6,552 by the time I'm 67 by cancelling.

But that's based on me paying $13 a month. According to Commbank Essential Super, my premiums "will generally increase each year with age." The PDS also says my premiums could increase to as much as $1,689 a year.

That works out as $140.75 a month, which is money I'd much rather have stay in my super, especially since I've only been paying into it for 4 years.

How to cancel:

It's really easy. For me, I'm with Commbank, so all I had to do was login to my account, click on my super, then insurance, then cancel. If you can't do it online, you'll need to call your fund.

Why I got a standalone life insurance policy instead

If you're like me and you don't have any kids or a mortgage, life insurance seems like a waste of money, right? That's a future me problem.

There are 2 reasons why that assumption is probably wrong.

1. The longer you wait, the more expensive life insurance gets.

On average, a 50 year old male pays $117.34 per month for a life insurance policy. That's $78.08 more than a 30 year old.

Also, if you develop any health conditions before you take out cover, it'll be classed as a pre-existing condition and you'll pay more.

I'm 27 and don't currently have any pre-existing conditions, so policies are fairly cheap. I got some preliminary quotes from NobleOak and TAL. Both were under $50 per month for a $1,000,000 payout.

2. I worked out a way that I actually save money.

It's cheaper for me to pay for a life insurance policy with AIA which gives me 50% off a gym membership at Virgin Active than just to pay for the membership. Here's how:

  • The Virgin Goal Getter gym membership ($51 per week) = $204 per month
  • The Virgin Goal Getter gym membership discount is $102 + around $60 per month for an AIA life insurance policy = $162 per month

So I'm getting a $1,000,000 life insurance policy on top of paying around $40 a month less for a gym membership. (AIA also gives you 50% off at Good Life and Fitness First, plus a range of other lifestyle benefits and discounts).

Even without the gym membership perk, standalone life insurance (cover you get outside out super) comes with other benefits. For example, policies typically expire when you turn 99 – not 65 or 70.

You can also opt for level premiums which means your premiums won't increase as you get older – you'll pay the same for the rest of your life.

The bottom line:

In most circumstances, you'll pay a lot less for a standalone life insurance over time if you take out cover while you're still young. You'll also be paying the same amount every month, so it shouldn't become unaffordable.

If, like me, you're in your late 20s or 30s, life insurance might not be your first financial priority. But if you're already paying for it through super, why not just get it sorted now?

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