Is Life insurance in your Super really super?

Jun 14, 2023 | Finance, News and Updates, Property Investing, Purchasing Property

Superannuation funds typically offer their members life, TPD and income protection insurance. Insurance is for a specified amount and is generally available without medical checks. It is “not guaranteed renewable” meaning they can change the terms or cancel it, and make their assessment at claim time. You cannot have trauma insurance in Super, which covers you if you suffer a critical illness like cancer, stroke or a heart condition. 

Recent regulation changes have cut life insurance cover for low-balance super accounts under $6,000, which haven’t seen contributions in more than 16 months. Similarly, people under 25 now must opt-in for life insurance via Super. 

But just because there is a life insurance policy option with your super fund doesn’t necessarily mean this is automatically the best policy for you. Superfund policies can offer different features and benefits than standalone policies available through insurance companies directly.

Life cover— also called death cover. This pays a lump sum or income stream when you die or if you have a terminal illness.

TPD insurance— pays you a benefit if you become seriously disabled and are unlikely to work again. TPD insurance in Super is generally only payable if you become unlikely to work in ‘any’ occupation for which you are reasonably qualified. Outside of super, you may be able to get TPD insurance which covers you if you are unlikely to work in your ‘own’ occupation, which might be more appropriate for you depending on your circumstances. The “Own” occupation definition may seem like a trivial extension, but it can be vital in the event of a claim. 

Income protection insurance— also called salary continuance cover. This pays you a regular income for a specified period (this could be for 2 years, 5 years or up to a certain age) if you can’t work due to temporary disability or illness. Income protection insurance offered by your super fund may not be as comprehensive as what’s required for your personal needs and available in policies outside of super. Policies in Super are not guaranteed renewable, meaning the fund or insurer can downgrade your policy terms and conditions at any time.

Cheaper premiums
Premiums are often cheaper as the super fund buys insurance policies in bulk. 

Claims payment by super funds can be slower
A claim under an insurance policy outside of Super is paid directly to you, or in the event of your death, to your beneficiaries.

When the insurance is through a super fund (including an SMSF), the insurer will pay the benefit to the super fund’s trustees. The trustees then have to determine if a condition of release has been met and who should receive the proceeds. Therefore the claim process can take much longer. Any excess funds that do not meet a condition of release will be retained in your superannuation fund.

Claims handling is deemed financial advise
If you want someone to assist with your claim, they must be a licensed AFSL holder (Financial Planner) or a lawyer ( their fee are usually disproportionate).

Taxation of proceeds
TPD and life insurance proceeds received from your super fund may be taxed depending on your or your beneficiary’s circumstances. The proceeds are generally not taxed if you own life or TPD insurance outside of Super.

Default Life and TPD cover from super funds is inadequate for most people
(Source: Rice Warner – “Underinsurance in Australia 2017)
Many Australians think the Life and TPD insurance they receive through their super fund is enough. But these amounts on their own are unlikely to be adequate.

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