Superannuation insurance: 3 hidden costs you must check now

Posted: 24 January 2022 4:40 pm
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Consumers are putting more and more cash into insurance held inside their superannuation. But are these policies really so super?

New research from DEXX&R found the value of group insurance policies bought by super funds, and given to their members, went up 7.4% in the year to September 2021 – totalling some $6.86 billion.

Financial expert Brenton Tong told Finder there has been a "massive uptake" in people moving over to industry super funds in recent years.

But Tong noted consumer awareness of insurance within super is often low. "On average, most consumers have not looked into what cover they have in their super fund," he said.

How does insurance held in a super fund work?

The most common types of insurance held in super accounts are death cover, income protection and TPD insurance. When you join an industry fund, you're given automatic insurance as a new member (except if you're under 25, in which case you must opt in).

You typically don't have to undergo medical tests for insurance within super because policies are offered on more limited group benefits (although the terms could be sufficient if you don't need too much cover). This is often a cheaper option than buying a standalone insurance policy.

With insurance that's held in super, premiums get taken directly from your super balance making the insurances easy to manage. Whereas a policy bought directly from an insurer will need to be managed separately, with payments made from your bank account each month.

3 cons of default insurance cover held in super

The main drawbacks to insurance within super are as follows:

  1. The policies aren't tailored to your needs as they are sold in bulk. This leaves you open to a higher chance of having a claim turned down.
  2. Terms aren’t as generous. A standalone life cover policy typically offers more flexibility for waiting periods or added perks, such as rehabilitation, for specific injuries. In some cases, some standalone policies can cover you up to the age of 65 rather than, say, 2 years.
  3. Your retirement savings could be cut. Money that otherwise would have been invested in your super is spent on your premiums. Over the years, this can really add up if you're with a high-performing fund.

"It's great to have default cover [within super] since a lot of people don't think to take insurance out. It's a nice backup since things do go wrong," explained Tong. "However, once you start looking into it in detail, a fully underwritten policy you've selected through thorough research is likely to give you much better value for money."

The group CEO of Financial Spectrum added that insurance is "a complete waste" if it's not going to pay out.

Why I'm glad I took action on my super insurance

For more than a decade, Sarah Megginson has held income protection cover through her super fund.

"Last May, I received a message from my super fund with the title 'Significant Event Notice'. I took a closer look," said Sarah. "It turned out, on 1 July, my benefit payment period was going to be cut from 5 years to 2, and my waiting period would double to 60 days – if I did nothing.

"I did some more research and decided to act. I was able to secure the same policy terms as before with a 5-year benefit period to protect me if I ever do have to claim. However, this decision led to my premiums going up."

Overall, the annual cost of Sarah's income protection insurance rose by 21% last year, from $738 to $891, while her life cover increased by 7% from $360 to $385.50; overall, she pays $178.50 more than last year.

Using Moneysmart's superannuation calculator, a worker on an average (mean) full-time wage would lose $6,716 in retirement savings due to a premium rise of $178.50, plus an account management fee, over 30 years.

But for Sarah, there was no question of going without income protection cover. "I know a woman who got a permanent disability in her late 30s and could no longer work," said Sarah. "She didn't have insurance, and it was a total nightmare."

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Sarah Megginson

Senior Editor, Money

How can I find out if I hold insurance in my super?

It can be simple to find out if you have insurance (such as income protection) within your super. You can call your super fund or check your super account online. You may also be able to find the information you need via your fund's app.

Expert Brenton Tong outlined 3 key tips on what consumers can do if they suspect their group insurance plan isn't offering them quality cover.

Number 1

Check your statement

You can find this by logging into your member portal. Check to see if you have any insurance. If you do, and you didn't ask for it and didn't complete a medical questionnaire, you likely have group insurance.

Number 2

Download a copy of your product disclosure statement (PDS).

Ideally, find the one from when you signed up. There will be a section called "Insurance". You don't have to read the whole thing, but read through "When we will pay" and, very importantly, "When we won't pay". If you feel that when they will pay isn't comprehensive enough or if one of the reasons why they won't pay might apply to you, it might be time to consider a personal, fully underwritten policy.

Number 3

Don't rush to move.

If you move to another insurance company, and in the period of time [between] when you took out the first policy and today, you've had any medical condition, you may lose cover for it. With group cover that's automatically accepted, they won't tell you if they're not going to insure you for something until it's time to make a claim, and by then – it's too late.

Tong added: "Insurance can be a very complex topic. Not only are there different types of policies, but each insurance will have its own unique definitions. And further, the policies change every few years, so what you could get cover for in the past might be different today.

"Tread carefully, because once you lose a benefit, you'll never get it back again."

You can compare your options with direct life insurance or income protection on Finder.

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