Does Your Super Fund Provide Enough Life Cover?

Know the Advantages and Disadvantages of Buying Life Insurance Through Super Fund

Even today, with information about everything available at your fingertips, it is alarming to see how uninformed people are when it comes to adequate life insurance cover. One of the primary reasons why Australians do not have enough life insurance could be the various myths that surround insurance in general. A lot of people believe that insurance premiums are typically very high and they will not be able to afford it. Another myth that keeps people from seeking adequate life insurance cover is the belief that insurance companies hardly ever pay out claims and thus it makes no sense in paying hefty premiums.

However, life insurance is an extremely important need in life and is something that all Australians should consider buying. You can choose to have life cover through your super fund or outside of it; but if it is through your super fund, you should take care to see that the life cover is enough for your needs.

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Advantages of Life Cover Through Super Funds

Availing of life insurance cover through a super fund can be a great choice as it comes with several benefits. These are:

  • Lower premiums: A super fund buys insurance for several of its members at a time. Therefore, since they are purchasing life insurance in bulk, they can negotiate a much better rate for the life cover from the insurance companies. This translates into lower premiums for you, which may not be possible if you opt for individual life cover.
  • Tax benefits: All the premiums that are paid towards a life insurance policy that is attached to a super fund are paid directly from the fund. Hence, as a member of the fund, the money for the premiums will be taken from your account and paid to the insurance provider. Since super fund contributions are taxed at a lower rate than normal, you stand to get the benefit of paying lesser tax on this money.
  • No need to undergo medical tests: A person who wishes to buy life insurance is usually required to undergo certain medical tests and examinations to ascertain their health. However, when you buy life insurance through a super fund, you may get automatically accepted without having to go through the medical procedures.
  • Automatic premium payments: Since the premium is paid out of your super fund account, you have the added benefit of automatic payments. People usually find it difficult to remove money from their household expenses to pay for insurance premiums, which is why many policies lapse. However, with direct premium payments through your super fund, you do not have to worry about that.

Due to the above benefits of buying life insurance through a super fund, many people choose to do just that. However, it is vital to know that there could be certain downsides to this option too.

Disadvantages of Having Your Life Insurance through Superannuation

While life insurance through superannuation can have various benefits in terms of tax deductibility of premiums and automatic acceptance, there are certain associated pitfalls too. Most people would opt to purchase life insurance through superannuation so that they can have the peace of mind of knowing that their families are protected against sudden deaths or disabilities. However, there are certain disadvantages of superannuation life insurance that can have the opposite effect as desired:

  • A potentially significant tax liability for beneficiaries: The Australian government allows for a certain amount of money from your super account to be passed on to your beneficiaries free of tax. If you super account balance is greater than the tax free threshold, your beneficiaries may be looking at a huge tax bill when your super fund benefits are released to them. And if you have life insurance through superannuation, it is more likely that you will cross the tax free threshold, thereby leaving your heirs with the possibility of a huge tax bill. Also, if any of your beneficiaries are persons other than your spouse, kids, and financial dependants, then they do not get the benefit of the tax free threshold at all. For them, every penny that they get from your super fund will be taxable. This is not the case if life insurance is held outside of super.
  • Restricted payout of benefits: An income protection plan can only be held as an ancillary cover within super, which means most people choose to have it as an added cover with their life insurance policies. While the super fund can claim tax deduction on the premiums for the income protection component, they can do so only for the premiums that are paid for the first two years of the said cover. Therefore, what some funds end up doing is that they restrict your benefit payments to two years as well. Needless to say, this could be a huge pitfall if you are disabled for longer than two years as your income protection payments may not cover you for the entire duration that you are out of work.
  • Delay in receiving benefit payments: When you hold life insurance through super, there is a chance that there is a massive delay in paying out the benefits to your beneficiaries or to you as well for added covers such as total and permanent disability cover. While the insurance company may find your claim to be valid and pay the benefits into your super fund account, these will not be released to you unless you fulfil the conditions of release of your fund. This is not the case if life insurance is bought outside super.
  • No payments for 'Any Occupation' insurance cover: If you have total and permanent disability cover along with your life insurance, it may be possible that your fund does not pay out any benefits since they do not consider you unable to work in 'Any Occupation'. Your insurance company may pay out your insurance proceeds into your super account since you are unable to work in your 'Own Occupation' and that is enough for them. But if your super fund works on the definition of 'Any Occupation' disability, then you may not be considered eligible to receive any benefit payouts.
  • Tax deduction not available: One of the main reasons why people buy life insurance through superannuation is to avail tax deductibility of the premiums. However, the tax deductibility is only available in situations where the premiums are being paid from deductible, concessional super contributions. If you already have other investments within your super that are made from the maximum concessional contributions, your premiums for life insurance may not get the benefit of tax deduction.

Calculating Life Cover Through Your Super Fund

Knowing how much life insurance cover you need is often a tricky task. It is generally believed that a person needs life cover that is equal to about seven times their yearly income, though this may vary significantly for each person depending on their situation and needs. With this much cover in place, you should be able to get about 60% of your income through life insurance payouts, which is considered to be adequate for most people.

However, since this a general rule of thumb, it may not apply to every individual situation. Hence, to know how much life insurance cover you really need, you have to consider the following factors:

  • Your current income: The amount of money you currently earn in a year will help you decide on the amount of life cover needed. Since most people want their families to be able to enjoy a similar lifestyle when they retire or if something bad happens to them, it is essential to have life cover that is based on your current income.
  • Assets and liabilities: If you have any liabilities and debts such as home mortgages, education loans for your children, etc, your life insurance cover should be enough to cover these debts in case you are not around to take care of them. Similarly, if you have managed to build any assets that can provide you with a recurring income without having to work, then this could help to lower the amount of life insurance cover that you need.

The number of dependents that you have will also have a bearing on the amount of life cover that you require. After you have considered all these factors, you should be able to determine how much life cover is enough. Once you have that figure in hand, you then need to check whether your life cover through the super fund is adequate or not. If it is lower than what you require, you can either increase your level of life cover within the super fund, or purchase a separate life insurance policy for the added cover required.

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Maurice Thach

An insurance researcher and writer for who loves finding an answer to the question "Am I covered for ________?" Maurice has also completed a Tier 1 Life Insurance and a Tier 2 General Insurance Certification under ASIC's Regulatory Guide 146. This means he can confidently provide general advice for life insurance and non-life insurance products.

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