Would you and your family really be covered by the insurance in your super?
Many Australians choose to be insured through their super as a low cost option and an option that only requires a tick in a box. This option is not underwritten which means that you can be insured without undergoing any medical assessment. Sounds great to most people and there is nothing extra to organise. However there are a number of pitfalls in taking this option.
Insurance bought by your super fund is usually bought in bulk to keep costs down. This means discounts to workers but it also means that the insurance has to cover a whole range of people and situations, and needs to be very generic. This is not an ideal situation, as a married worker with three kids and a mortgage will need more substantial cover than a 20 year old living at home. So what may seem like a lot of cover to a young person may be nowhere near covering what a 35 year old would need. The standard amount of life insurance held in super is between $100 000 to $150,000. (Source: Comminsure). This is around two to three times the average salary, not enough to pay off a mortgage or build capital to look after your family. Life insurance needs to take care of your loved ones in the event of your death and needs to at least cover all your debts.
With no medical assessment for your insurance your premiums could be set at the average person in your industry. This average person could be a long way from who you are. In some industry funds you may actually be paying more for your insurance and getting less cover due to this averaging. Also without a medical assessment no pre-existing conditions are taken into account. So if you have had back problems before being insured you will not be covered for the pre existing ailment.
Total Permanent Disability insurance is offered in super funds but there are limitations in owning TPD in super. The point to note is that when you have TPD held in super is that the “any occupation” definition is applied. This means that you will only receive a payout when you are totally and permanently disabled for “any occupation” that you are reasonably suited for by way of education, training and experience. Whereas policies outside of super allow a definition where you are covered for “own occupation”. For example if you were a surgeon and went for a cheaper “any occupation” policy then the insurance company would not pay out if you could still perform as a general practitioner but were unable to continue as a surgeon. If however you were covered under the “own occupation” definition and couldn’t work as a surgeon again then you would receive payment.
Another problem with TPD in super funds is that you may be covered by “own occupation” by the insurance company but the trustees of the super fund operate payouts on the “any occupation” coverage. This means that you may have prompt payout from the insurance company into your super but you cannot access that money until retirement.
Gaining insurance through your super fund may be a cheaper and easier option but as you can see it will not be catered to your individual needs. The points above are just the tip of the iceberg with problems or misconceptions that people have about protection from their super insurance. While it is better to have some insurance even if it is through your super fund it may fall short of the amount and standard of cover you need to protect yourself and your family from financial ruin. The best advice is to get your financial planner to go through your individual circumstances and tailor your insurance to your specific needs. This will insure peace of mind and proper coverage in the worst of situations.
Article dated – 18th December 2007
Written by Alex Warren, Mango Wealth Creation