25 November 14

The Dangers of Default Life Insurance

Compulsory employer-funded superannuation has been one of the great benefits for employees since its formal introduction in 1992; giving employees the chance to save for an independent retirement.  Employer contributions have gradually been increased, and will continue to do so over the next decade.  In addition to the savings component of superannuation, most industry and employer-sponsored super funds have default Life Insurance and Total & Permanent Disability (TPD) policies that are included with membership in the fund.  Some also have default Income Protection policies.  These policies are not normally subject to medical underwriting, meaning that employees are automatically accepted for the insurance regardless of their health.

The positive side of this is that people who wouldn’t normally have insurance (or couldn’t get it) have at least some cover.  The dangerous side is that those same people often think that the cover is enough for their needs.  And so often it is nowhere near enough in the event that something went wrong with them.

As an example, a popular industry fund that is used by many tradespeople, offers default life insurance and Total & Permanent Disability insurance as part of membership.  The default life insurance cover is $208,000 and TPD is $104,000 for members aged 22-511 .  Whilst this is better than no cover at all, if the member doesn’t review this cover, because they think this is sufficient, they could easily leave their family in a difficult situation in the event of premature death or disability.

In a hypothetical example, let’s say our super fund member, David,  is married to Julie, and they have two small children.  David is the sole breadwinner. They have a mortgage of say $300,000.  David dies unexpectedly. Julie will receive the $208,000 life insurance plus the balance of David’s super fund. Depending on that super balance it MAY pay off the mortgage, but Julie still has two small children and no income.  Clearly, David and Julie need to arrange more life insurance cover.

On the other hand, David might be single, with no debts or dependants.  In that case, $208,000 of life insurance cover may well be much more than he needs.

And that’s the issue with default insurance.  It may suit you or it may not.  The danger lies in thinking that by having default insurance that you are appropriately covered.

What to do about default insurance in Superannuation

Employees & Self-employed  – Analyse your situation and consider what would happen if you were to die unexpectedly or become totally and permanently disabled. Who relies on you for income and how much will they need?  How much will you need for yourself and for how long?  Financial Advisers specialise in this process and can provide advice in calculating the appropriate levels of cover and selecting the appropriate policies.

Employers – Consider engaging a Financial Advice service to assist your employees with their insurance and superannuation needs.  This simple, cost-effective benefit demonstrates a commitment to your employees well-being, and may well help avoid difficult issues in the event of a health issue (or worse) with an employee.

For an obligation-free discussion on your own super and insurance or a program for your employees, contact Advice For Living Pty Ltd, Financial Advisers, on 03 8370 5307, or email us at info@adviceforliving.com.au or visit our website at www.adviceforliving.com.au

1Insurance handbook for Cbus Industry Super. 1 October 2013