Are Your Insurance Needs Covered?
The start of a new year is always a good time to check whether your insurance policies are still serving your needs. But this year there is even more reason to review your cover.
If your super balance is less than $6000 or you are under 25 and are a new fund member, the life insurance through your superannuation will no longer be automatic come April.i
Letters have already been sent out to those affected by the change which is part of the Putting Members First/Protect Your Super Package legislation. If you don’t respond to the letter by advising your super fund that you want to maintain your cover, it will be cancelled.ii
Since last year, super accounts inactive for more than 16 months have been in a similar situation with automatic cancellation of life insurance if the member doesn’t opt in to continue their cover. There are a few exceptions, such as defined benefit funds, so contact your super fund if you’re unsure.
Of course, most Australians with super won’t be affected as their balances exceed $6,000 and they are aged over 25. Indeed, due to the existence of the default offer of life insurance through their super, many more Australians have cover than in previous times.
Sometimes, however, this cover may be insufficient to cover your actual costs, should you need to make a claim.
Underinsurance still common
A 2017 survey by Rice Warner found the median death cover was only twice the median household income. Yet it’s estimated that people in their 30s with children would need replacement income equivalent to eight times their family income to continue their current lifestyle if one parent were to die.
Similarly, total and permanent disability (TPD) cover is generally only three times the median household income when four times is ideal. TPD pays you a benefit if you become seriously disabled and are unlikely to ever work again.
While life and TPD cover have grown thanks to super, only about 30 per cent of the working population has income protection insurance. Income protection pays you regular income for a specified period when you are unable to work due to temporary disability or illness.iii
Given the size of mortgages these days and the cost of raising a family, this low level of income protection cover is concerning.
You probably don’t think twice about insuring your car or your home, so why think twice about insuring your ability to earn an income should something unexpected happen?
Do regular check-ups
Insurance needs vary depending on your income, your age, your family situation and your working status.
Clearly if you have a young family and a mortgage, your financial commitments will be greater than if you have paid off your mortgage and your children have flown the nest.
That’s why it’s important to check your insurance when it comes up for renewal and/or when your personal circumstances change. For instance, if you have recently married, had a child or retired you may need to alter your level of protection.
Life insurance in super vs out?
For some, life insurance outside super may provide more tailored cover than insurance offered inside super, or you might decide to have a combination of the two.
Life insurance in super is often cheaper because super funds can negotiate group rates and your premiums are paid with pre-tax dollars. Generally, you will be covered without having to undergo a medical, but there are drawbacks.
Unlike insurance inside super, cover outside continues when you change jobs. And claims are likely to be faster as benefits are paid directly to the policy owner and not to the fund.
Also, outside super, you can insure “own” occupation rather than “any” occupation with a TPD policy. This means you will get a payout if you can’t continue working in a similar occupation to your current one. “Any” occupation is a much broader definition and can lead to a lower chance of making a successful claim.
Life insurance is a must for most people, but it will be of limited use if you don’t have adequate cover should you make a claim.
If you need help determining your current insurance needs, give us a call.