When you need - and don't - need insurance through super

It's fair to say that when most people think about their superannuation their focus will be on the account balance, and any insurance they do have will likely be a bit of an afterthought.

That's if they have life insurance, total and permanent disability (TPD) insurance or income protection insurance with their super at all. 

Around eight million of the roughly 15 million Australians with accumulation-phase superannuation accounts have some kind of insurance through their super, a report published in March by the Australian Securities and Investments Commission (ASIC) revealed.

That leaves roughly seven million people without. Some of that cohort will be those aged under 25 or with a balance under $6000 who are no longer automatically opted-in to insurance through their super.

Others will have chosen to opt out because they're covered by insurance outside of super, while some will have decided that the cost of insurance isn't worth the cover on offer.

There are benefits to being insured though - benefits that may become more or less important as people's lives change. So with that in mind, is there a 'right' time to opt in to super-based insurance, and does that level of cover need to change over time?

Marriage, mortgages and dependants 

David Evans, head of insurance at Aware Super, says that major life events that add financial obligations or dependants are typically the factors that trigger people to think about their insurance needs.

"Purchasing a first home and taking on a mortgage is a classic one, so is when people get married and start to have a dependency relationship, and also when people have children.

"So if you don't have family to call on, or other financial resources, then insurance in super can absolutely play an important role there to provide you with a safety net of cover should something unfortunate happen."

Susan Quinn, of advocacy group Super Consumers Australia, notes that working out whether to take out insurance through super is a bit of a balancing act. 

Ultimately she recommends that people weigh up the cost of insurance fees - and the impact this extra cost could have on a retirement balance - against the benefits insurance can provide. 

"If you do need insurance, ask yourself how much money you'll realistically need if you're sick, injured, or disabled and unable to work," she recommends.

"There's a bit of help available on the ASIC Moneysmart website where they have a life insurance calculator to help you figure out how much you might need to leave the people who rely on you financially if you pass away."

The Moneysmart life insurance calculator is free to use and can help answer whether you need cover at all, how much cover you might need and what expenses insurance could cover if you die. 

Can you leave it too late? 

As with any type of insurance, it's hard to anticipate when you, or your family, might actually need to rely on life insurance, TPD insurance or income protection insurance. Hopefully never.

It's a decision that each individual will need to make, but as Evans explains, there can be downsides to leaving the decision too long.

"The benefit of taking insurance out early, particularly with life insurance, is that people's health does change over time," he says.

"By not taking out that insurance at an age where you are healthy, there is then a risk that you either might be uninsurable depending upon your health situation at the time, or you might not be able to obtain that insurance on the same terms.

"So what you might find is that when you apply the insurer will provide cover, but they may provide it with what's called a premium loading, or alternatively, an exclusion meaning that they can't cover you for certain conditions."

Should you regularly review your insurance?  

For those who do decide to opt back in to insurance through their superannuation - and for the millions of Australians who are already insured this way - it can be useful to check in on a regular basis to make sure that the cover is still providing what you need. 

"Life insurance shouldn't be a onetime thing that is set-and-forget. Whether people take out life insurance inside or outside superannuation, it's important that they do review it on a regular basis, because the truth is that our needs change due to the changing circumstances of life," says Evans.

According to Quinn, people may want to consider tweaking their level of cover as they age or as their needs change. 

"If you're proactive about your insurance in super you can usually dial up or down your cover. For example, if you're starting a family you could dial it up, or you could dial it down if you're getting closer to retirement."

"Often policies are built in a way where they automatically dial up or down, or they'll keep your premiums level but start to reduce the benefits as you age. So you really need to check with your fund to see how they structure their policies and if they're meeting your individual needs."

Five super insurance tips  

Of course, there's plenty more to think about when it comes to taking out or managing insurance within your superannuation. Here are five things to keep in mind.

1. Watch out for junk insurance

"When we talk about junk insurance, we mean total and permanent disability insurance that's setting a really high bar for someone to be able to make a claim," explains Quinn. To avoid it, Quinn suggests looking into how an insurer defines 'activities of daily living' which could limit whether or not you can receive cover (even if you can't work), as well as whether your specific job or occupation is excluded from cover.

2. Name your beneficiary

"With insurance through super it's really important to make sure that you have a beneficiary recorded so that the superannuation trustee understands your expectations in terms of how you'd like any benefit to be paid," Evans says.

3. Don't ditch your existing insurance too quickly

"If you do decide to switch policies, make sure you can get the cover you want elsewhere. There are exclusions and carve outs that mean you might need to undergo medical tests before you can get insurance with another provider, so it's worth holding on to your existing insurance until you know that you can make that switch," Quinn says.

4. Check your level of cover

"When they provide automatic insurance, many super funds will only provide a basic safety net of cover. So even if there is insurance, it's not necessarily going to meet the needs of all individuals. It's really important to make sure that you understand what insurance you need: both in terms of the type of insurance and also the level," says Evans.

5. Look at how your insurer deals with claims: "The way your insurer manages claims is a really important marker of the value you're getting out of your insurance and what you might expect if you do have to make a claim down the track. You can go online to Moneysmart's life insurance claims comparison tool where you can see how often your insurer is paying out on claims and how long they're taking to process them," says Quinn.

You can start using the Moneysmart life insurance claims comparison tool here, or for more information on the types of insurance you may have included through your super fund, check out our handy article on making sense of your superannuation insurance cover. 

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