(03) 9020 2905
Default insurance coverage inside super is fuelling a dangerous “she’ll be right, mate” attitude to protection among Australian families.
Too many Australians see some minor levels of insurance inside their super funds and believe they are “covered”.
But default coverage levels have not taken anyone’s circumstances into consideration. Your need, or your family’s need, could be far more or less. (It will generally be substantially more.)
Levels of default coverage offered through super have generally risen in the last two decades, but has left those who need insurance the most – young families – still dangerously under-insured.
Parents with kids under 10 years of age, and considerable mortgages, can often need $1m or more worth of pure life insurance.
Most default levels of cover, where they exist, will be 20 to 40 per cent of that.
The need for the “life insurances” typically starts around age 30, grows until around age 50, then starts to taper down to nothing by age 60 or 65.
The growth period is typically as individuals become couples, buy homes, have children, take on mortgages and then potentially take on investment debt and/or start their own businesses.
Income and debt levels tend to peak in the late 40s and early 50s, which is when insurance needs are typically highest.
It’s also roughly when kids hit their mid-teens. By that time, parents have done the hard yards and the kids are only 5-6 years off being able to fend for themselves.
Default insurance is that offered automatically upon joining a super fund. It is a no-questions-asked level of coverage that is designed to give an absolute base level of cover to super fund members, largely in the event of the super fund member’s death.
Default cover came about because of systemic levels of under-insurance, and super funds wanting to make sure that surviving partners had some level of cover in the event of the death of an income-earner.
Early incarnations would have cover at levels of as little as $50,000 to $80,000, which decreased with age. But average levels, where offered, are now typically between $200,000 and $400,000.
Default insurance cover is not offered by all super funds, but is common with employer-sponsored funds, government and industry funds.
The health of the super member is not assessed prior to the cover being offered. That is, there is no questioning of the member’s health before the cover is offered.
This can be advantageous for those who need insurance, but whose health is less than perfect.
Default cover is usually offered in units, for a defined price per unit. That is, for, say, $3 to $4 a week, the member gets $200,000 of cover for life insurance (and potentially a similar, or linked amount, of insurance for total and permanent disability).
Australians often see this level of cover when they open their twice-yearly super fund account statements and believe that they are covered, even if the insured amount is a fraction of what they actually require.
The insurance offered as default cover inside a superannuation fund can be three-fold. The first two are straight life (death) insurance, and life insurance with an element of linked total and permanent disability (TPD) insurance attached. Often, the level of TPD insurance is the same level of cover as the life insurance, but it may also be a fixed, lower, percentage of the life insurance coverage amount.
The last sort that can be covered via super fund is income protection or “salary continuance” insurance. Income protection insurance is designed to cover up to 75 per cent of your ongoing income. But, typically, default levels of salary continuance cover in super funds is for around $1000 a month and would be unlikely to cover even a fraction of mortgage or rental repayments for most workers.
The problem for those who need insurance is to try to determine the correct level of cover.
Most people should sit down with a financial adviser to work on a plan to help determine a package that is suitable and cost effective for you.
This will often include having the life and total and permanent disability insurance inside superannuation, where the premiums are tax deductible to your super fund, and where you can optimise the cost by covering those premiums by salary sacrificing some of your salary into super.
The other life insurances – income protection and trauma insurance – are generally going to be best covered outside super, out of your own pocket.
Bruce Brammall is the author of Mortgages Made Easy and managing director of Bruce Brammall Financial. E: bruce@brucebrammallfinancial.com.au.