Think back to the last time you checked how much life cover you have through your super. Chances are, it was a while ago. According to money watchdog ASIC, almost 10 million super accounts have insurance in place. While MetLife research shows that one in two of us know we have at least some cover through our fund, beyond that, things can be a bit hazy.
The thing is, the vast majority of Australians rely on the default insurance provided by their super. It can be an easy option, but your fund knows very little about you, your life or your circumstances. So, settling for default cover is a bit like letting a stranger decide how much your home should be insured for – something few of us would stand for.
The other issue is that insurance through super is not a freebie. The premiums come straight out of your account. Since you’re paying the cost, it makes sense to have an appropriate level of cover. And, as Chesne Stafford, Chief Customer and Marketing Officer at MetLife, pointed out, “Your insurance needs will generally change over time as your circumstances change.”
While it’s tempting to assume you’ll never need to rely on your insurance (and here’s hoping you won’t), the reality is that an insurance payout could play a major role in you or your family’s quality of life if the unexpected happened. “Some members do take an active interest in the level of cover they have. But it’s not nearly enough given how important personal insurance can be,” Manager, Member Advice and Education at Active Super, Lisa Judge, explained.
The bottom line is that it’s worth checking your cover through super as you move through various life stages.
How to check the cover you have in place
Checking the cover you currently have through super – and who the insurer is – is not hard. There are a few options. You can:
- call your super fund
- access your super account online
- check your super fund’s annual statement, or
- take a look at the fund’s Product Disclosure Statement (PDS).
Once you know how much cover you have, head to Canstar’s Life Insurance Needs calculator. It can show if there’s a shortfall, meaning you’re underinsured, and your level of cover could do with a top up.
Trigger points to check your cover
There are key milestones across different life stages that should trigger a review of your cover. Let’s take a look at these.
The early years – starting out
“People often overlook life insurance when they first start working, especially if they don’t have a mortgage. But getting started early means you are setting yourself up for a confident financial future,” Ms Stafford explained. “At this time in your life – the early years – total and permanent disability (TPD) cover tends to be the most critical.”
TPD provides a payout if you experience permanent injury or illness that makes it difficult or impossible to return to work. “While you may not have significant debt, if you were permanently unable to work, TPD will help to cover the expenses to maintain your lifestyle. You might also need financial support to adapt your home to accommodate a disability,” Ms Stafford noted.
Ms Judge said tying the knot can be “a good time to take stock and see what cover you have in place individually and discuss your ‘together’ plans for the future”.
If you do opt for default cover, don’t assume you have the same level of protection as your partner, mates or co-workers – even at a young age. ASIC says two identical fund members could have widely varying levels of cover depending on the super product they each have.
As an example, ASIC found the payout on default life cover plus TPD insurance for a 30-year-old woman can range from $100,000 to $933,000. That’s a massive difference. The only way to know if your cover is at the lean end of the spectrum is to check with your fund.
Buying a home or increasing an existing mortgage
Buying a home generally means taking on a big debt. This becomes especially critical from an insurance perspective if you share that debt with a spouse or partner, and you rely on their income to keep up the repayments.
“Ask yourself what might happen if you and/or your partner were unable to work due to illness, disability, or death?” Ms Judge suggested. Worst case scenario it could see your other half forced to sell the property if something happened to you.
Starting a family or the birth of a child
Having kids is a life changer. Suddenly there’s another human being who relies on you completely for all their needs.
“When starting a family – or on the birth of another child – think about the changed dynamics, not only regarding future work plans, but also ensuring you can cover the added expense of having an extra little person in your life,” Ms Judge said.
With both parents working in many families these days, be sure to review the life cover and TPD of each parent – not just the main breadwinner. Childcare is expensive and it makes sense to insure both partner’s lives for a similar amount.
The prime years
Our ‘middle years’ may be our peak earning period, but it’s also a time when we can face big expenses and have sizeable debt. Ms Stafford noted there is also “a growing group of people who are responsible for both children and their parents – the ‘sandwich generation'”.
When considering how much cover you need, Ms Stafford suggested tallying all the expenses that would need to be covered if you could no longer work – or worst case, were no longer around. This can range from general living expenses through to school fees and even costs associated with caring for older dependents.
“When changing jobs, it’s particularly important to review your salary continuance (income protection) cover. The level of your cover does not generally change automatically as you get a pay rise,” Ms Judge said.
Okay, not everyone will go through the divorce wringer. Hopefully, you won’t. However, close to 50,000 marriages end in divorce each year according to the Australian Bureau of Statistics, so it’s worth knowing how it can impact your insurance needs.
“Getting a divorce can be tricky – and often affordability is an issue,” Ms Judge said. “We may see that one person becomes asset rich but income poor, or vice versa.” That said, insurance through super, especially TPD and income protection cover, can become critical at this stage because you may not have the financial resources of a partner as back-up.
Heading towards the golden years
Ms Stafford noted that when you assess your assets and plans for retirement, it’s a good time to review your life insurance needs to ensure they are still appropriate. “Once major debt has been paid off, or you are no longer supporting dependents, or have reduced living expenses and are self-sufficient through investments or superannuation, it may make sense to reduce your level of cover,” she explained.
“When deciding to retire, remember that insurance is not generally held within a superannuation income stream such as an account-based pension,” noted Ms Judge.
Even if you plan to work indefinitely, your super fund may draw a line in the sand beyond which life cover isn’t available. As a guide, with Active Super, automatic life and TPD cover continues through a member’s working life – while they’re accumulating super, but only to age 70.
How to adjust your level of cover
Adjusting your insurance cover is as easy as completing a form on your super fund’s website or contacting the fund directly. Remember, more cover means higher premiums, and this can impact your final super balance on retirement.
Working out just what that impact may be calls for some serious number crunching as it depends on your age, the premiums you select, your contributions and how your super is invested. That said, your fund should be able to crunch the numbers. Or, you may speak to a financial adviser to know whether it works out cheaper over time to top up your cover with separate cover organised outside of super.
Cover image source: insta_photos/Shutterstock.com