In Australia, it is compulsory for employers to make a superannuation (super) contribution for their employees (SGC). The current rate is at 9.5% of employees’ wages. Most super funds automatically provide some insurance to members, so many people have default insurance within their super. However, because there is insurance in super, many people mistakenly think that it is no need to buy another policy separately.
Insurance within super does have its advantages, such as no requirement for health check, low premiums, but its default insurance has limitations. Here are some examples:
The default cover sum insured is quite low and likely inadequate
The typical insured amount of insurance through super is about $100,000 to $200, 000, which is far from the insurance needs of ordinary families. As a rough guide, actuarial firm Rice Warner estimates the life insurance needs for 30-year-old parents with children to be around eight times the family’s yearly income. You may also need to consider your home mortgage amount and the cost of your child/children education. Therefore, your insurance cover in super may not be enough. Of course, you can also apply to the superannuation company to increase your insurance coverage, however, this will require a health review.
The types of insurance and benefits are limited.
Firstly, insurance through super usually only has death cover, total and permanent disablement (TPD) and income protection. However, it lacks critical illness insurance (trauma insurance) which is extremely important. Secondly, the insurance benefits in super just meet the bare minimum. There are no other optional benefits to choose from, especially income protection policy. Furthermore, superannuation insurance premiums usually increase with age, and there is no option for fixed premiums. Some superannuation companies reduce the insurance coverage of members year by year to try to keep the premium unchanged. One of our clients once told us that his superannuation insurance amount used to be more than $100,000, but now when he is getting older, he only has $30, 000 cover, which made him quite upset.
The restrictions of beneficiary in life insurance in super
There are certain restrictions on who can be the beneficiary of life insurance within super due to superannuation regulations. In addition, if the beneficiary is not a spouse or a dependent, the life insurance claim proceeds may be subjected to tax. On the other hand, if life insurance is outside super policy, usually it is no tax no matter who the beneficiary is.
Super insurance is organised by the super company to help its members. Superannuation companies are the policy owners of insurance policies. In the event of claims, because the insurance payouts have to go to your superannuation fund before they go to you or your beneficiaries, and the trustee then has to determine if the condition of release has been met and identify the correct beneficiary, there can be a delay in the death benefit being paid out. Sometimes takes months.
Lack of flexibility.
The insurance within super is bundled with super fund. If you don’t like your current superannuation company and want to change to another company, then your insurance within it will also be cancelled. Although the new superannuation company may provide insurance, it may not be the same as the original one. The most troublesome thing is that the new insurance usually has a period of exclusion clauses for existing illnesses. If you get health problems as you grow older, then the new insurance may not be able to cover you. Based on this consideration, some people are forced to keep two superannuation accounts, just for the purpose to keep the insurance within. As a result, they have to pay double management fees and waste money.
Starting from July 1, 2019, in order to protect everyone’s superannuation from eroding various expenses, the government has stipulated that the superannuation balance is less than $6,000, or the account is inactive (without access records for 16 months), unless the member informs the insurance company to keep the insurance, otherwise it will be automatically cancelled. Therefore, some people will potentially lose their insurance.
In summary, if the insurance through your super fund is the only one you have, it is worth to review it carefully, as it may not meet your individual needs.