Is super a life insurance saver?

When it comes to protecting your family through life insurance in super, it’s wise to ask a few questions, writes Anthony Keane

LIFE insurance within superannuation is set for big changes as the Federal Government prepares to rewrite the rules, but one key question remains for millions of Australians: inside or out?

The cost of protecting your family financially if you die or can’t work is usually cheaper if your insurance is inside super, and it doesn’t drain your household budget because employer super payments cover the premiums.

However, insurance specialists say there are other factors to think about beyond cost. And the best option can vary depending on the type of life insurance: death cover, total and permanent disability, income protection and trauma insurance.

May’s Federal Budget unveiled plans to remove default life insurance in super funds for people aged under 25, inactive members and those with balances under $6000. This should be considered when looking at the pros and cons.

THE CASE FOR INSIDE

Life insurance company NobleOak says insurance in super can be easy to obtain and there is usually no underwriting (a detailed check of your personal history).

There are no medical requirements unless you want to increase your cover, applications may involve just a few questions and you won’t have to do much research.

“Cover inside super can be relatively inexpensive compared to other cover available directly or through advisers,” said NobleOak CEO Anthony Brown.

But the levels of cover within super are usually modest and could fall well short of what a person needs to protect their family, he said.

THE CASE FOR OUTSIDE

A stand-alone life insurance policy that is fully underwritten could be better tailored to people’s needs and there is more certainty in the event of a claim, Mr Brown said.

Wotherspoon Wealth director Simon Wotherspoon said while this option generally costs more, you know what you are getting and it won’t be shut down by government rule changes.

“If you hold a retail policy in your own name, they can’t cancel it on you,” he said.

Mr Wotherspoon said policies within super and cheap direct insurance policies often left underwriting until after a claim, which created “kind of a lottery”.

“The risk there is you think you are covered but when you go to make a claim you are not, because you had a pre-existing condition that they were not aware of and they’re not going to pay,” he said.

Life insurance outside super removed an “extra layer” in the claims process because super fund trustees had no power to decide if you met a condition of release of your funds, Mr Wotherspoon said. He often recommends different structures for different products. While trauma is unavailable within super, income protection offers tax deductions when held outside, yet death cover is “black and white” so can stay inside.

Mr Brown said cheap direct insurance policies sold over the phone in five minutes do not give people time to understand their cover.

“A low premium may seem attractive, but customers are often unaware of policy exclusions, such as preexisting condition exclusions which are included in some products,” he said.