The life insurance cover you get through super is automatic, usually doesn’t require medical checks and often, but not always, is more affordable than buying an individual policy. But there are some negatives.
Default insurance is not that portable and the cover may be limited or even useless. The commission found default cover to be extremely complex and hard to compare.
Much has been said about consolidating super funds to save on fees but fund members need to be careful how they proceed, particularly if they have health issues.
“Although you can move super benefits into the one fund, you may lose the insurance embedded in those other funds,” says Clare Mackay, an independent financial adviser at Quantum Financial.
“We have had clients who have come to us and they have four or five funds and then when we delve into their health concerns we decide to keep a couple of different funds because they were established before they were diagnosed with an illness.
“It’s one thing to say consolidate it all but if you have any known health concerns you might want to pause and think about which funds you want to consolidate given that you might potentially lose some valuable cover.”
Mark Kachor, managing director of life insurance researcher DEXX&R, says if you are a 35-year-old and want $1 million to cover a Sydney-sized mortgage, then it’s probably cheaper to consider an individual policy through a life company.
While $300,000 to $600,000 default death cover may be sufficient, it may nevertheless come with a number of exclusions for pre-existing illnesses when it comes to disability cover. Income protection cover inside super is also very low – just $2000 or $3000 a month.
“You need to pay particular attention to the terms and conditions and the amount of benefit you have,” says Kachor. “If you don’t have enough, you’re paying to disqualify yourself from social security benefits but still haven’t got anywhere near an adequate income for ongoing payments while disabled. You have to question whether you are getting value for money.
“If you are looking to have an adequate amount to cover a Sydney-sized mortgage, which inevitably is $1 million or more, you can get cover with more comprehensive benefits at a lower cost from a retail life insurance policy than you would get inside super. And it would always be guaranteed renewable and the terms and conditions can’t go down.
“There’s a lot to be said for people being informed and buying cover that is appropriate to their needs and that they can comfortably afford. That’s where quality advice is valuable.”
It’s particularly valuable if you’ve had health issues. Mackay says financial planners learn a lot about their clients’ health history.
“A good planner will work with the underwriter. You don’t ever want to have on your record that you were declined insurance. So if you’ve got known health issues, you want to get a pre-assessment.”
That means sussing out what the assessors think of that medical history.
“If they are going to decline it, then withdraw your application. If you go to get travel insurance and they ask if you have ever been declined insurance, then you have to answer honestly. So when you’ve got health issues it’s about navigating that carefully.”
Something as common as depression can be an issue.
“I’ve had clients seeing specialists as they go through major life events like divorce and death in the family and they’ve quite rightly gone and got some support. Ten years ago that would have been held against them. Nowadays, underwriters are more open to having conversations about the circumstances in which those things are happening.”
She says members have to be careful how they pose the questions. “You talk to them about ‘What if … ’ and not say ‘I have …’ It’s about navigating your way through it and it can be difficult and that’s why part of the work we do for our clients is to navigate the complexity for them.
“It shouldn’t be as hard as it is but, unfortunately, this is how the system works. So if you don’t feel confident doing it yourself, partnering with someone that can advocate on your behalf can take away a lot of the stress.”
What to look for in a new super fund
• Fees – the lower the better.
• Pick a fund that has performed well over the past five years – do not chase last year’s best performer.
• Make sure there are investment options that suit your needs and comfort with risk.
• Find out what insurance cover is available and what it will cost.
• Phone the fund or check its website to see what other services are on offer.