Insurance through super: how it works, what you need to know

Our own demise isn’t something we like to think about. But none of us knows what tomorrow brings, and if you’re raising a family, have several dependants or high debt, life insurance (often referred to as death cover) is a really important component of financial security. In a perfect world, we’d all also have total and permanent disability (TPD) cover and income protection cover too.

The trouble is, all this cover doesn’t come cheap. The good news is that your super fund can be an easy source of personal insurance. Super funds arrange group cover for a large number of members – buying in bulk. So, the premiums can be lower than for equivalent cover outside of super. The key is to know what protection you have.

Around 50% of working Australians know they have insurance in super¹. The problem is not many people think about it much, check the cover is right for them or consider the adequacy of cover.

This ‘she’ll be right’ approach can leave you or your family financially high and dry if the unexpected happens. Take the time to find out what you’re covered for through your super, and how much cover you have in place.

What is included in default cover?

Most Spirit Super members get default cover when they become a member and meet certain eligibility conditions.

Default cover is a set amount of insurance based on your age. The amount of default cover and the cost you pay for that cover will change as you get older.

The types of cover we automatically provide to eligible members include death and TPD cover and income protection cover.

Not all members are eligible for default cover, so it’s important that you review the eligibility conditions in our Insurance guide.

You could be underinsured

While your fund can explain how much cover you have, it’s up to you to assess whether the level of cover you have is sufficient. That’s a key downside of default cover – it doesn’t take your personal needs into account, and you could not have enough if you need to make a claim.

The Underinsurance in Australia 2020² report from Rice Warner (now part of Deloitte) confirmed an ongoing gap between how much cover many Australians have through super and how much they need. This gap can be greatest for young families.

As a guide, Rice Warner found a family with parents aged 30 needs basic death insurance worth an average of $561,000 and TPD cover of $874,000, per parent. However, an Australian Securities and Investments Commission (ASIC) review of the default cover that 20 different MySuper products offered found the combined payout of life cover plus TPD averaged just $420,515 for a 30-year-old.

Your cover should reflect your needs

Bear in mind, the level of default cover inside your super doesn’t stay the same throughout your working life. Our default death cover peaks at age 34, tapering off thereafter. This may be fine if you started a family at a young age, but it’s likely to be insufficient if you delayed having children until your 30s or 40s.

It’s important to check you have the right level of cover for your needs. Think about your life stage and what expenses you would need to cover.

If you’re young, you might only have a mortgage to pay. If you’re a little older, you may want to think about expenses associated with your children’s education and lifestyle.

If you’ve had children but they have moved out and you no longer have a mortgage, your needs will be different again.

Taking out the guesswork

There are a range of tools available to help pinpoint how much cover is right for you. Check out our Insurance needs calculator and crunch the numbers to decide the appropriate level of cover for your situation.

How to increase your cover

It’s possible to increase or decrease your insurance through super. This lets you be sure you only ever pay for cover you need.

Increasing your life insurance through super can require completing a medical questionnaire or undergoing a medical check. This can take a bit of time, and how much extra you pay will depend on your circumstances, including your age and health status.

Nonetheless, there can still be good reasons to upgrade cover through your fund, rather than arranging insurance independently. The premiums are automatically deducted from your super account and there can be tax benefits to paying this way. For example, pre-tax super contributions are taxed at 15%. This is likely to be less than your marginal tax rate, so super can offer a cost-effective way to give your cover an uptick.

Beware the impact on retirement savings

The downside of increasing your cover through super is the impact on your long-term retirement savings.

The cost of your cover comes straight out of your super, and over the course of a working life it has the potential to reduce your final balance on retirement. That’s not just because of the cost of premiums. You’re also missing out on the compounding returns the premiums would have earned if the money had stayed in super.

Speak with us to learn what you’re covered for, decide if you need more protection, and ask how much any additional cover would cost and the probable impact on your super balance. This can help you strike the right balance between meeting your insurance needs and minimising the impact on your nest egg.

Are you even covered at all?

Don’t simply assume you have cover in place through your super. Three situations can potentially leave you with zero cover.

1. If you’re under 25: Spirit Super cannot provide default cover for new members under 25 unless you opt in.
2. Your super is below $6,000 or inactive: Regardless of your age, funds can’t provide default cover until your super account balance reaches $6,000, unless you opt in. If your fund hasn’t received contributions for at least 16 months they’re required to cancel your cover, unless you tell them you want to keep it in place. If that sounds like you, contact us to opt in to default cover early or keep your cover in place.
3. You don’t have sufficient super to pay for premiums: If you were among the Aussies who withdrew money from super under the COVID-19 early release of super scheme, you may not have enough left in the kitty to pay insurance premiums. Contact us to check.

See whether you’re doubling up

Four million workers hold more than one super account³.

If you have super with more than one fund, consider rolling the balances into a single account. Be careful though. When you leave a fund, your insurance cover doesn’t go with you. You may be able to transfer your cover, however you would need to arrange this before rolling over your account. When you’re switching to a completely new fund, it may be difficult to arrange cover if you have a pre-existing condition like heart disease or high blood pressure, or if you’re over 60. Check with your new fund beforehand.

You can also check whether you have any lost or unclaimed super savings. You can do this through the myGov portal or through Find and combine in Member Online . Navigate to the Contributions tab and select Find and combine.

Get advice

Insurance is an important part of your financial plan and it always pays to talk to a financial adviser about the cover you need.

Find out more about insurance through super.

Article supplied by MetLife Australia, our insurance partner.