Is default life insurance through super worth having?
Life insurance held inside super is currently under the spotlight with underperforming funds costing Australians millions of dollars a year, and unnecessary or unsuitable life insurance policies eating up balances with administrative fees.
Life insurance through super has several benefits such as cheaper premiums, easy payments and guaranteed acceptance, but its main benefit is that it is providing cover for a majority of under-insured Australians who otherwise wouldn’t have life insurance.
However, it can also cost a substantial amount over a lifetime and can significantly reduce your potential retirement benefit, so if you don’t know what insurance you have in your super and how much you’re paying for it, now’s the time to check with your super fund.
Why you should review your life insurance through super
To find out about life insurance you may have in your super, you should check your statement or call your super fund directly. You should ask them what type of insurance you have, how much cover it provides and how much you are paying for that cover.
You should also find out how your premiums are being calculated, because wholesale insurance bought in bulk is often “one size fits all” and will fail to differentiate between various risk groups. This means you could be paying more than you need to because your premiums are being calculated based on a higher-risk group such as “blue collar smokers”.
Problems of super life insurance
Other reasons to review your insurance through super could include:
- If the amount of cover is insufficient. Typical life cover inside super is around $100,000 - $200,000, while long-term protection for your family could work out being closer to $1 million. In this case, you should consider either topping up your default policy or buying additional insurance outside super.
- If you have not consolidated your super. If you have more than one super account following you around, you may also have more than one default life insurance policy (you can only claim on one, but you will be paying fees on both). If you suspect that you have other super accounts out there, the ATO has a free online facility where you can search for unclaimed super.
- If you are relatively young with no dependents. In this case, you may not consider life insurance to be a pressing concern and may not want the premiums reducing your super balance. On the other hand, life insurance is cheaper when you are young, so you may consider a cheaper default policy such as this to be a good alternative at your stage of life.
Over and Underinsurance
Dangers of over insurance
Among the many issues surrounding super life insurance, over insurance is a major problem and simply put, means some people are paying far more for insurance than they need to.
This occurs mainly when people (often young people) have more than one superannuation account, usually because they move between jobs and lose track of super held through previous employers.
If several of their accounts contain life insurance, then those people are wasting their retirement funds paying premiums for cover which is being duplicated in the other super accounts. The danger with this is that their super balances are depleted unnecessarily over time.
Dangers of under insurance
The flipside of over insurance is under insurance, and can be just as dangerous for those with super life insurance. Industry studies1 have revealed that as many as one in two Australians is under-insured by at least $100,000 and that the average default cover in a super life insurance policy is between $100,000 and $200,000; an amount that is hardly sufficient to look after the needs of a family faced with today’s high cost of living.
Should you opt out?
At the moment, if you do not want the default life insurance that comes with your super, you must notify the super fund that you wish to opt out. However, with the scrutiny this type of insurance is now coming under, this may change and you may soon need to opt in to have such cover included.
In the meantime, whether you opt out depends on your particular circumstances. If you have more than one policy then you might want to cancel all but one of them to avoid paying duplicate premiums. If you are young, you may also wish to cancel your default life insurance and take out a policy a few years further down the track.
However, if you are a low- or middle-income earner with no life insurance and a family to protect, you may wish to stay with your default life insurance in the absence of a better alternative and perhaps top up the level of cover at some stage through a low-impact method such as salary sacrifice.
What's been happening lately?
A recent report by the Productivity Commission included several recommendations on how they considered the problems of default life insurance could be addressed. These included:
- Giving the ATO the power to consolidate lost accounts on our behalf
- Cancelling life insurance cover on inactive super accounts (those that haven't had contributions for 13 months)
- Making life insurance inside super opt-in for under 25s who don't yet feel they have a need for it
- Appointing a suitable body to conduct a formal independent review of default life insurance through super