Most people think that their superannuation provides enough insurance cover or they think that they do not need added cover.
Insurance is purely a backup plan to ensure that you are protected in the event something unplanned happens. This article covers a few facts about insurance in superannuation and where to get more information.
What do you need?
Before examining the cost and benefit of insurance ownership, you need to first calculate how much cover you need based on the following:
- total debts including mortgages, personal loans and credit cards
- future family income needs so that your income could be replaced specific funds to provide for your children including education expenses funeral costs; and
- provision for specialised medical care and rehabilitation costs in the case of total disablement or critical illness.
What is available through my employer superannuation plan?
Once you have calculated how much cover you need, you should consider the value of the insurance benefits in your employer sponsored superannuation plan. Remember that you can have both your employer sponsored superannuation fund and personally arranged insurance plans in place as part of your back up plan. You also need to check definitions of disability and other cover restrictions under employer sponsored superannuation insurance arrangements. They can often be more restrictive than personal insurance plans in terms of what’s covered and the degree of disability required to make a successful claim. Generally speaking, employer superannuation plans do not calculate insurance benefits based on an individual’s needs but on a pre-set formula, such as a pre-set ‘unit of cover’ or ‘multiple of salary’. Furthermore, recent research by IFSA revealed that default levels of cover in superannuation funds for most people would not provide an adequate level of financial security, should the unexpected happen. Don’t just be a statistic by checking out what you have in place and making sure it is adequate for your needs.
What if you are disabled, sick or injured?
You should check if you are covered for the diagnosis of traumatic events such as heart attack, stroke and cancer through your superannuation funds. While the fund may offer cover for total and permanent disability, cover is unlikely to extend beyond this. In relation to sickness and accident, while some employers offer ‘group salary continuance schemes’, they don’t always offer insurance cover up to the generally accepted maximum of 75% of gross income or additional benefits to reimburse superannuation contributions. The payment of salary continuance benefits can be limited through superannuation funds, which may leave you out of pocket if you are sick or injured for longer than that. In reviewing the insurance available within your superannuation, you should also check on the conditions of release as these are often limited, meaning that any claim payments made could be held within the superannuation fund until you retire or that you need to meet a severe definition to access your superannuation cover.
What if you start a new job?
If you are about to leave your employer and you want to take out a personal policy, you should apply for it before you leave your current employer, in case you can’t obtain personal cover. This gives you the fall back position of exercising a continuation option, within a certain period of time, from the superannuation fund you are leaving.
Handy hints
Everyone needs a back up plan, be it cash savings or access to additional funds in the event of an emergency.
Insurance provides the back up plan if you do not have the capital or asset backing in the event of the unexpected.
Review what you have in place including if you have a public sector defined benefit scheme.
If in doubt contact Money Mechanics to review your current arrangement to ensure you have the right back up and protection plan in place.
Scott Malcolm (scott@money-mechanics.com.au) is Director of Money Mechanics (ph: 6257 5557) a fee for service advice firm who are authorised to provide financial advice through PATRON Financial Advice AFSL 307379.
The information provided on this article is of a general nature only. It has been prepared without taking into account your objectives, financial situation or needs. Before acting on this information you should consider its appropriateness having regard to your own objectives, financial situation and needs.