17 Nov 7 Ways Insurance through Super may be Hurting You
When most people tell me they have adequate insurance in their super fund I can’t help but raise an eyebrow (a useful skill of mine).
Insurance through super is often a mine-field of ‘ifs and buts’ and so I urge you to do your due diligence because super funds can change their insurance coverage and definitions. This has been happening lately due to a huge claims experience, which is hurting the super funds financially.
Here are 7 ways insurance through your super fund might be hurting you.
1. I’ve got Life and Total & Permanent Disability cover (TPD), right?
Did you know that if you make a successful claim on your TPD cover in superannuation then your life cover will reduce by the claimed TPD amount? That means you might be left with nothing extra for your family in the event of your death.
This should be concerning because regardless of what online calculators might say, in my opinion death and total and permanent disability are two separate financial events, each with their own specific cost base and requirements. Have you factored this into your planning?
2. I can claim on Income Protection and TPD, right?
Some super funds I’ve come across say that if you qualify for Total and Permanent Disability benefits they won’t pay you Income Protection at the same time. Their argument is that Income Protection in superannuation land is seen as a ‘temporary’ disability benefit, which is why most super funds only offer benefits for up to 2 years. If you’re declared totally and permanently disabled you sometimes can’t have both.
This is a precarious position to find yourself in because TPD and Income Protection serve two different functions. TPD is a lump sum of cash designed to repay debt so the bank isn’t chasing you during a difficult time and also serves to provide cash funding for costs associated with your total and permanent disability. Do you have $100K laying around for a wheelchair accessible vehicle?
Income Protection meanwhile is the drip-feed monthly bank deposit designed to reflect actual income and therefore pay for food and bills and all the other everyday costs of living.
The two policies should compliment each other, not be an either/or situation, because at the end of the day you will be inadequately protected.
3. Totally and Permanently Disabled
Australian Super has quietly passed back a change in TPD definition to their members. You used to be able to claim when it could be proven that it was unlikely that you would be ever able to engage in any occupation to which you are reasonably suited by education, training or experience. Australian Super have snuck in a slight addition in their definition to read that you are declared totally and permanently disabled when it is unlikely that you would be ever able to engage in any occupation to which you are reasonably suited by education, training or experience,“or any job that you may become reasonably suited to with further education, training or experience”. It’s their get-out-of-jail-free card to retrain you for a different job rather than pay out a claim.
Any of my current clients who have set up a complimentary external insurance policy to work with Australian super are being offered full reviews, because a change like this could derail the effectiveness of their entire insurance portfolio. If you’re in the same boat please drop me a line.
4. Tax time
Did you know that Total and Permanent Disablement benefits are taxed in the event of a claim under preservation age? The tax can be steep too – up to 21.5%! That’s a massive slap in the face at claim time, thinking you’re going to get the $500,000 you’re insured for, but actually ending up with closer to $395,000. It’s especially rough when you need as much money as you can to set you up financially for the rest of your life, because you’re not going to be working ever again. It’s even more rough if you don’t get Income Protection through super at the same time (see point 2)!
Life cover could also be taxable depending on who your beneficiaries are. Beneficiaries as defined by the ATO mind you, not by what you and I might think a beneficiary is. All these different laws can be hard to navigate – who thought a Life insurance policy could be subject to insurance, superannuation and estate planning law?
5. Decreasing benefits
There are some super funds whose insurance cover is set at a ‘sliding scale’ past a certain age. Once you hit a certain age your benefits will decrease each year until reaching $0. A lot of members aren’t aware of this and therefore even though their debt continues to rise (especially in this property-centric market we find ourselves in) their life and TPD insurance is already woefully low and continues to get worse, in most cases without them realising it.
6. Income Protection – are you actually covered?
Income Protection through super can only cover you if you’re actually working. Outside of super your Income protection policy will continue to cover you and you can exercise a claim as if you were working for up to 12 months of unemployment, maternity leave or sabbatical.
Depending on the super fund the policy may cease to cover you if you quit work, if you’re made redundant or if you’ve been non-working for more than 90 days. That’s really scary because it potentially means you’ve got no breathing space between jobs to be covered and that you’ll have to start a new policy. If you’ve had medical changes this may affect your ability to apply and/or claim on future policies.
Don’t ever underestimate the importance of medical underwriting to insurers.
7. Generic Policies
I know I’ve been slagging off super funds insurance policies and, in my opinion, with good reason. I don’t understand how an institution “run to profit members” can treat members so poorly when it comes to insurance coverage, diversity of investment options and also be able afford all that TV advertising, but it is important to note that apart from all their individual guidelines that may affect you, the fact is the insurance cover though superannuation funds is primarily governed by superannuation law. As a result the insurance offered must always be of a generic, one-size-fits-all nature. By its very definition that means it’s only really a stop-gap solution for people who aren’t ready to seek proper advice and at the end of the day I have no qualms in saying I do not believe insurance held solely through a superannuation fund is the smartest choice for your financial future.
I will agree that one of the good things about cover in your superannuation fund is that the super fund pays for it, meaning your budget isn’t affected. But I can’t help but hear in the back of my mind “ain’t nothin’ for free”. There’s always a catch. 7 of them have been outlined above.
So what do you do if your personal budget is tight but you want to comprehensively review your insurance requirements?
Recently there have been innovations in insurance cover through the big insurers (not the big super funds) that mean you can alleviate all of those concerns above, have good quality policies that are properly underwritten and have been tailored to your specific requirements with the help of an adviser, and still have your industry or other super fund pay for most of it.
It is a fantastic solution and has really served to address the issues raised above. I highly recommend looking into it if the above leaves you concerned.
Got questions? Want to know more? You can email me at firstname.lastname@example.org.
Oh and the usual disclosure: my words are my own, not reflective of my licensee, seek proper advice before making any decisions. Full disclosure can be found on this page