Not so super cover can chip away at savings
ARE YOU aware that some managed super funds include default life insurance cover which you are paying for and which over time can really chip into your super savings, and not even give you the cover you expected?
Association of Superannuation Funds of Australia's chief executive officer Dr Martin Fahy said superannuation funds must comply with a disclosure regime which requires them to provide full details in writing of the insurances attached to superannuation accounts.
But, it's the devil in the detail which Canstar's general manager of wealth Josh Callaghan points out. "It's not sold in a way similar to a personal loan where you may be offered some loan insurance," Mr Callaghan said. "It's not offered in that way; it's essentially packaged up as part of the product itself. Some products have it, some don't."
"It's been a relatively common practice with industry funds, whereas with retail funds I think only one out of the 10 funds we have assessed have default cover. It's sort of been seen as a built-in benefit to have a superannuation scheme," Mr Callaghan added.
Mr Fahy confirmed that when default life insurance is provided automatically, which usually happens when a person joins a fund, there is no requirement for an agreement to be signed.
A benefit that costs
It's a convenient option instead of having to shop around for life insurance cover, if you want to take it out. But, it comes at a cost.
If you haven't already done so, you probably should contact your super fund to ask if your super package includes life insurance, how much it is costing you, what are the conditions of the cover including reduction of cover due to your age and does your premium increase as you age.
"With a lot of the default insurance which is within a fund, from the age of 50 they really start winding back the level of cover," Mr Callaghan said.
"They (seniors) might find themselves paying for a default life insurance in their fund that only covers $10,000 if they were to die which obviously is fairly inadequate for what you would expect."
Types of life insurance
There are four types - default and tailored insurance offered within super, direct from a provider which generally can't be paid for through your super fund, and purchased insurance through a financial adviser.
"One of the benefits of superannuation is the tax environment and that you are contributing pre-tax dollars, and that they are taxed at a lower rate than you are probably getting charged outside," Mr Callaghan said.
"If you talk to a financial adviser, they may have options where your premium for that life insurance can be paid from your super. In certain circumstances, your readers may find that they actually end up with the right level of cover with better coverage and better terms and they are still able to deduct from their superannuation."
You can opt out of the super fund default cover, but then if you decide to take out life insurance cover directly, you may well find the insurance company you are talking to is going to need your medical history which may lead towards you not complying with the cover rules or being required to pay a much higher premium.
Callaghan also warns: "Keep in mind that if you do opt out of the default insurance, it's unlikely you will be able to opt back in with your current super fund. You will instead need to apply for tailored insurance or if you specifically want default insurance, you would be required to switch super providers."
The other choice is to talk to your super fund about the cost and conditions around a tailored life insurance package under your managed super fund.
Mr Callaghan encourages a conversation with your super fund to find if the default cover - which generally is worked out across the average of people being covered and could include a variety of ages, work types and risks - is suitable to you and if a better cover can be arranged.
It's also wise to carefully read through the annual statement which the Association of Super Funds Australia advises contains the bulk of any policy changes. "Additionally, when a fund makes a significant change to its insurance arrangements relating to the items such as cost, policy inclusions, or benefits, it is required to issue a significant event notice before they take effect," Dr Fahy added.
The Parliamentary Joint Committee on Corporations and Financial Services, Life Insurance Industry recommendations were released this week.
The committee considered group life insurance through superannuation issues including opt-out requirements, member awareness of cover, and the impact of premiums on small super balances.
Its opinion was the current opt-out model was appropriate. However, it was clear the issue of duplication of policies was a major concern.
Chief among the recommendations was the call for "legislating to require life insurers and superannuation funds to provide regular updates to policyholders of the level, type, extent and cost of life insurance cover that they have using a standard form disclosure format, enabling them to compare with other funds or, in the case of superannuation, make them aware that they have access to life insurance."
Some of the other recommendations are -
- Identifying and dealing with duplicate life insurance accounts within superannuation fund accounts.
- Informing consumers about how to seek advice before making insurance policy changes.
- Legislating to protect the savings of members with low account balances or who don't receive value from default insurance.
Self-Managed Super Funds
Seniors who have SMSFs do have conditions around life insurance. If you have an SMSF, Mr Callaghan recommends you check your compliance paperwork to ensure you have documented your choice of including or excluding this type of insurance.
"All superannuation trustees should have gone through this process," Mr Callaghan said. "If they haven't they should speak to their adviser or administrator about going through the process of considering life insurance."