Most employed Australians are members of a superfund into which their employer contributes 9.5% of salary, or more.
Most of those super funds offer life and disability (TPD) insurance on a “default “, opt-out basis. It’s offered automatically on joining, without medical evidence or testing of your particular health situation. The super funds go to great lengths to advertise that it’s cheap cover and it usually costs under $4.00 a week for most occupations.
Australians are notoriously casual about what’s in their super fund, probably because they can’t access it for years or until certain conditions are satisfied, and the contributions are not coming out of their pocket. We find very few people read their annual super statements, and if they do read it, it’s usually a perfunctory glance at the value of their accumulation and the fund performance. Reading that super statement to ascertain your life cover is something that very few members, or their spouses, bother with, until a life event happens.
That “default” cover looks good, but there is a sting in the tail. To maintain that low premium cost as the fund member ages and the risk of claim increases, the Trustees of the super fund and the insurers who provide the cover for the members have built-in a programmed reduction in benefits each and every year, starting at around age 30 and reducing to zero at age 60, or thereabouts. The table that sets out these planned reductions in your insurance cover is usually published in the super funds “insurance brochure”, available from the funds web site. Naturally, fund members are expected to locate and study that table.
For example, one of Australia’s largest public offer super funds features “default” death and TPD cover, where if the member joins at ( say) age 30, and his “default” cover initially matches his mortgage, his “default “ cover then reduces to 22.6% of the starting cover by age 40, and to 78.8% by age 55, leaving a significant deficit to pay out the mortgage on death, if there is no other cover. If a member bought a home at age 30, and never went into further debt by age 60, and his family needs had not significantly changed, then the system of “default” cover may well only partially cover the (much slower ) reducing mortgage debt. The theory, by the way, is that your super accumulation makes up for the significant difference between reducing insurance cover and debt, assuming solid investment returns. A copy of a sample table is available on request from our office.
In the real world of course it’s different. Firstly, super fund investment returns are rarely consistent, at least without risk, in our current low interest environment, nor sufficient in most cases to make up the rapidly increasing gap between insurance cover and debt. And then there is the tendency to upgrade one’s home at least twice in a lifetime. In the ACT, for example, the average length of time between upgrades of homes (where it is common to accumulate even more debt with the new home) is 7.5 years. The mere arrival of children complicates that need even more. And of course, divorce often adds debt.
Australians should be reviewing their life risk needs, regardless of the source of cover, on a more regular basis, depending on the employment situation and certain other factors. Relying on “default” insurance provided by your superfund could result in severe financial hardship for you and/or your family if you suffer one or more of the inevitable events of life, only to find, too late, that your level of “default “cover is not sufficient.
So what’s the plus in this situation? Well you may have some form of “default “death and TPD cover in your super, albeit fast reducing. The downside is the premiums are reducing your super accumulation, unless you choose to contribute funds to cover the costs of the premiums, and there is one certainty – while your cover remains “default” cover, the sum insureds will reduce each and every year, regardless of your needs and objectives.
In any event you should seek a regular review from a qualified life risk Specialist. At the very least, for your own peace of mind, you should obtain a copy of the table from your superfund website, showing the reducing benefits for “default” insurance cover, to decide if your “default” cover matches your needs.
Bill Brown is a Sub-Authorised Representative (341438) of Bill Brown & Associates Pty Ltd,(343087) trading as Estate Forethought. Bill Brown & Associates Pty Ltd is a Corporate Authorised Representative of Sentry Financial Services Pty Ltd. AFSL 286786, ABN 30 113 531 034
The information contained herein is of a general nature only and does not constitute personal advice. You should not act on any recommendation without considering your personal needs, circumstances and objectives. We recommend you obtain professional financial advice specific to your circumstances.