You’ve probably heard that one of the changes announced in the Federal Budget was around insurance inside super. Almost all group superannuation accounts (that is, industry super funds and the superannuation products offered by the banks and other large financial institutions) come with an automatic level of life insurance and TPD cover. Some also provide some income protection insurance. The premiums for this insurance are paid directly from the balance of your super account.
The Government is worried that this automatic insurance cover, or more specifically the payment of premiums, is eating into peoples’ superannuation balances and leaving them without enough money for retirement. So, they have decided to make life insurance cover inside super an optional benefit instead of an automatic one for people aged under 25 years. Superannuation accounts with a balance less than $6,000 or accounts that have not received a contribution for 13 months or more will also only have insurance offered as an ‘opt-in’.
Sounds like a good thing, right? If you’re young or retired, or only have a little bit of money put away, surely it makes sense for the Government to save you from paying for something you don’t need?
My question is: Why let the Government tell you what’s the best option for you?
No matter what your age, or your super balance, there are pros and cons to having automatic insurance cover inside super…
Funding your insurance through your super fund is a tax-effective way for many people to pay for cover, because their employer pays a regular contribution into their super, which is then used to pay the premiums, unlike the rest of their salary which is taxed before it is paid into their bank account.
For people without a regular income, using their super to pay for their insurance means they can maintain a level of cover without having to worry about the impact on their cashflow.
A poor medical history or ongoing health issues can make taking out personal life insurance harder or more expensive. Having cover automatically provided by your super fund gives you some peace of mind that your loved ones won’t be left in financial strife if you should pass away.
If you are young and have no dependants and no debt, you may not need life insurance cover. Which means you’re paying for something you don’t need.
If you’re approaching retirement, or have already retired, you may no longer need life insurance cover. Especially if you no longer have dependants or have paid off your mortgage. Hanging onto your insurance cover inside super may be drawing down unnecessarily on your retirement funds.
Not all insurance cover inside superannuation is ‘good’ cover. Some funds have very specific conditions under which you can claim, making it very difficult to get a payout. For example, when assessing a TPD claim, some superannuation providers (particularly industry funds), will only pay out if you can prove you cannot do any type of work, not just the kind of job you currently do.
Take control of your own future
What many people don’t realise is that you can make changes to your automatic cover inside super – you don’t have to wait for the Government to do it for you. You can ‘opt-out’ of your insurance at any time. You can increase or decrease your cover, depending on your needs. You can even purchase a better level of cover, that will give you more opportunity to claim, and structure it so that you’re still paying the premiums from your super fund.
A financial adviser can look at your whole financial situation, not just your age or super balance. Not only will they tell you what option is best for you, they will also do all the work to get things set up. Which means less stress for you all round.
So, whether the Government’s latest round of changes to super have a direct impact on you or not, I hope I’ve helped you realise that you should really be taking control over your own finances and getting professional advice.
The difference between taking your own action or leaving it to the Government to choose for you could mean thousands of dollars in the future. Ready to choose your own adventure? Give me a call now.