Key to the right cover

THERE IS NO ONE-SIZE-FITS-ALL ANSWER WHEN IT COMES TO LIFE INSURANCE NOBLEOAK WRITES

Many Australians hold default life insurance through their super fund. This is often automatically applied to your account once you join the fund. The question is: are you better off with default life cover or a standalone policy? As with all things related to personal finance, there is no one-size-fits-all answer. Here are just some of the factors to consider before you decide how to structure your life insurance to best meet your needs and those of your family.

Possible advantages of default life insurance in super

• Funds purchase policies in bulk, so premiums might be cheaper.

• Budget-friendly option because premiums are automatically deducted from your super balance, not your bank account.

• Generally, you are automatically accepted for a certain level of cover without a health check.

• You can make contributions to super to help pay for your insurance (for example, through salary sacrifice), which may reduce your tax and the possible drain on your retirement savings.

Possible disadvantages of default life insurance in super

• Cover may not be as comprehensive as it is with a fully underwritten, standalone policy. The true value is not what you pay but what your beneficiaries receive in the event of a claim.

• Premiums are paid from your super account, so unless you make extra contributions your retirement savings will be eroded.

• With default cover, the insurer generally doesn’t know as much about who they are covering compared with a standalone policy that has been fully underwritten, so there might be exclusions you won’t know about until it comes time to make a claim. This may include pre-existing condition clauses or other industry- or occupation-specific exclusions. (Exclusions can apply to all types of cover, though, so it’s always a good idea to read the terms carefully.)

• Different rules around life insurance policies owned through super may make benefit payments taxable depending on whether your beneficiaries are tax dependant.

• Due to recent legislation changes, if you fail to elect to keep your cover in place, or to make regular contributions, your insurance cover may be cancelled, leaving you underinsured.

Is default cover enough?

The cover amounts in default life insurance are in many cases relatively low. This can be fine if, for example, you are young and single. However, if life insurance is a key part of protecting your family’s financial future, you may need a higher amount. You can do your research and calculate how much cover you might need. There are some resources online, such as NobleOak’s life insurance calculator. If an increased cover level sounds like a good idea, you could consider topping up your existing default cover under super or perhaps taking out an additional policy. You might find that it makes sense to compare life insurance policies to find one that offers the appropriate cover and provides value for money.

Key considerations at a glance

Broadly, insurance products can be broken down into two types: partially underwritten or fully underwritten. The type of underwriting can determine the level of cover you get. It helps to provide as much information about your health at the outset so there are no surprises at claim time. The table sets out some important things to consider regarding life insurance products (they are available from NobleOak) before you decide which option is right for you: