Insurance in super: 7 questions answered

Most of us know we have some sort of insurance with our super fund, but the devil can lie in the details. We talk to the experts to answer seven common questions about insurance in super.

It’s that time of year when Australians will start receiving their annual super fund statement. While many of us will make a beeline to check fund returns, it’s also a good idea to see how your insurance shapes up.

According to the Association of Superannuation Funds of Australia (ASFA), close to one in two people don’t know what insurance they have in place through their super. One in four aren’t sure if they have any cover at all. Yet the insurance offered by your fund could be a financial lifeline if you, or your family, need to make a claim. And it can happen more often than many of us realise.

First up, let’s be clear about the type of insurance we’re talking about. The cover automatically provided by super funds typically includes:

• Life insurance (also known as Death insurance), which is payable as a lump sum to the people you nominate, usually your family, if you pass away.
• Total and Permanent Disability (TPD), which pays a lump sum if you become totally and permanently disabled because of illness or injury.
• Some funds also provide income protection insurance, which is a regular payment, often around 75% of your normal wage or salary, if you can’t work due to ill health or injury. Income cover can be an optional extra, which comes at the cost of an additional premium.

With the basics sorted, let’s demystify how insurance in super works.

1. Is it compulsory to have insurance in super?

“It is compulsory for all MySuper funds (low-cost default funds) to offer default death and TPD insurance for members,” James Carey, Chief Group Insurance Officer at MetLife, said.

There are some exceptions to this rule. Since April 2020, life and TPD insurance isn’t usually provided for people aged under 25 (unless you work in a dangerous occupation), and those with super balances below $6,000. Similarly, insurance premiums aren’t deducted from super accounts where no contributions have been made for 16 months or more (known as “inactive” funds). If you tick any of these boxes, you can opt in to have cover.

On the flipside, just because your fund offers insurance doesn’t mean you have to take it. “You can opt out if the insurance in super isn’t right for you. But we encourage fund members to check their life insurance to ensure they have the necessary financial security for their lifestyle,” Mr Carey explained.

Be warned, if you opt out of cover it may be possible to opt back in at a later date but acceptance is not automatic. You may be asked to have a health check, and the premiums can be higher.

2. Is it cheaper to have insurance inside or outside super?

The cover provided by your fund may be automatic when you first join, but it’s not free. The premiums come straight out of your super savings. However, it’s likely to be cheaper than insurance arranged outside of super.

As Mr Carey noted: “The premiums for insurance inside your super can generally be more cost-effective as the super fund is able to negotiate more attractive premiums by insuring a large pool of members.”

Despite the potential lower cost, there can be downsides. “The old adage, ‘you get what you pay for’ is key when it comes to insurance,” Helen Baker,  financial adviser and author of On Your Own Two Feet – Steady Steps to Women’s Financial Independence, told Canstar.

Ms Baker noted that default cover is arranged without the backing of tailored advice, and importantly, the level of cover is not monitored on an annual basis. “One of the big issues with group policies (through super) is that they can often be ‘unit’ cover,” cautioned Ms Baker. “This is where the amount of cover automatically reduces the older you get. So you think you have $1 million of life insurance, but when you go to claim 10 years later, it may be $500,000.”

She added that for other policies arranged through super such as income protection insurance, “you generally can’t get the bells and whistles such as extended payment periods, partial payments, endorsed and agreed cover”.

3. What happens if I want to increase my level of cover?

A golden rule of any type of insurance is to have sufficient protection for your needs. This can be a weak spot of insurance through super as default cover is unlikely to reflect your personal needs.

Knowing how much cover you have is as simple as phoning your fund or checking the annual statement. The tricky part can be working out how much you need. “We know from MetLife’s research that around two thirds of all people don’t know how to calculate how much insurance they need,” said Mr Carey.

Fortunately, there are tools available to find your insurance sweet spot. Many super funds have online calculators to work out the level of cover that’s right for you. Or head to Canstar’s life insurance calculator. If you need an additional helping hand, Mr Carey explained that your super fund can go through the different types of insurance with you, and assess what you need from each.

If it turns out you don’t have sufficient cover, it’s a simple matter of asking your fund to boost your level of protection though you may be asked to have a medical check.

As Ms Baker pointed out, topping up your cover will mean paying higher premiums, which will affect your final nest egg. The best way to know exactly how an increase in premiums will impact your super over the long term is to speak with your fund.

→ Related: How much life insurance do you need? 

4. Does a mental health history affect my cover?

Mental health issues impact one in five Australians, so it’s not a rare condition. Despite this, money watchdog ASIC found that when it comes to TPD cover through super, mental health claims were around five times more likely to be declined than other types of claims. That’s because some insurers assess TPD claims using a test based on “activities of daily living” (ADL).

Broadly speaking, under the ADL test, claimants may need to show they’re unable to perform a number of basic physical activities such as speaking, walking, eating or using the bathroom. Someone with a mental health disorder may have no problem with these activities – and so can have a TPD claim rejected even though they can’t work.

“Activities of daily living tests are very common in the insurance industry,” said Ms Baker. “And for TPD cover, you can’t have an ‘own occupation’ definition inside superannuation, only an ‘any occupation’ definition, which is a much harder definition to meet.”

Your super fund can provide more details on how a history of mental health issues could impact your cover. However, if concerns over personal health issues – of any sort – see you thinking about buying cover outside of super or shifting to a different super fund, Ms Baker had a note of warning: “The big risk lies in cancelling the cover you currently have before arranging insurance elsewhere. You could find that due to personal health history, you can’t get cover at all.”

5. What happens if I have insurance in more than one super fund? Can I claim on both?

Australian Taxation Office data shows that more than 12 million people (around 74% of us) have just one super account, though that still leaves four million people with two or more super balances. The Productivity Commission estimates that doubling up on insurance premiums across multiple funds can erode retirement balances by more than $50,000.

That said, there can be valid reasons for holding several accounts. With some funds, you won’t be covered for any illnesses or injuries you had before becoming a member. So, if you have a pre-existing condition it can make sense to hang onto an old fund to get the benefit of any existing cover, even after you’ve joined a new one.

Are multiple policies a problem at claim time?

“For life insurance you can claim for all the policies that you have. The same for TPD,” Ms Baker explained. When it comes to income protection cover, however, she said: “You can normally only claim from one source.”

That’s because policy documents often feature clauses that prevent workers receiving more than a set percentage (usually 75%) of their gross salary while off work. Claiming on more than one policy would mean exceeding that benchmark, so it’s a big no-no as far as insurance companies are concerned.

This situation has given rise to the term “zombie” policies – insurance policies that fund members are paying premiums for, which they’ll never be able to claim on. If you have more than one fund, check there are no zombie policies lurking in the shadows of your super.

6. How fast are claims paid and how does it compare to direct cover?

If you have to claim, it’s a no-brainer you want the money sooner rather than later. According to Mr Carey: “The time it takes to process a claim depends on the type of claim, the circumstances of the claim and providing the required information to the fund or insurer.”

Making a claim on life insurance, for example, will call for a death certificate to be available. TPD claims can require a far more complex body of evidence including expert medical reports.

The Moneysmart website shows the average processing times for individual insurers across different types of claims arranged through different channels.

The table below shows industry average wait times but they really are a guide only. For something like income insurance, the averages suggest you can wait 2.4 months for a benefit to be paid if you have cover through super, as opposed to 1.5 months for cover organised through a financial adviser. The reality though is that claim processing times vary significantly between insurance companies, and even across channels with the same insurer.

Time for claims to be processed

← Mobile/tablet users, scroll sideways to view full table →

Source: Moneysmart based on data from 1 January, 2020 to 31 December, 2020. *Figures not available on Moneysmart.

7. Can I claim a tax deduction for my insurance in super?

The premiums paid for insurance held through super can’t be claimed on tax. If you buy income insurance outside of super, the premiums are normally tax-deductible because any payments you receive under a claim are fully taxable.

This article is part of the Canstar Super Guide. MetLife is one of the sponsors of the guide but the editorial content has not been influenced by the sponsors and is in line with Canstar’s Editorial Charter. You can download your copy of the 2021 Super Guide here.

Cover image source: WAYHOME studio /Shutterstock.com