Topic Three: Superannuation - Insurance

In this topic we discuss the personal insurance you may have in your superannuation account and what it covers you for. We also look at some of the features of insurance which include: age limits, pre existing medical conditions, duplication of insurance, what information you will need to do an insurance review and considerations before you cancel insurance at retirement.

Action plan:

1) Identify if you have any current insurance in any super account you hold, what the amounts are, what the premium costs are and what age expiry and any other conditions that might be impacted by your decision to retire;

2) Meet with a financial adviser to undertake an insurance needs analysis to identify if you should retain your insurance and what amounts, features and benefits would be best suited to you and/or help you understand if you should cancel it.

3) Understand the impact of changing super accounts at retirement and any impact this will have on insurance you hold which we will discuss in the next topic.

Transcript

Copy Transcript Copied

SPEAKER_00 0:00

Hello everyone and welcome to topic three. Now today we are going to be talking about insurance in your superannuation account. Now, this is one of those topics that you might feel free to skip right past if insurance is not of any interest to you. But before you do that, I really want to make sure that you know whether or not you've got insurance in your superannuation account. Because there are three really important leaks to superannuation. We've already spoken about the first two, and that is contributing money to your super, how your super is invested. But the third one I'm going to argue is insurance in your super. Because I was always surprised by how many people didn't know that they had insurance or how much it was, like how much it was taking from their savings to have that insurance if they weren't really invested in it. So most retail super funds these days offer personal insurance as default when people open an account. So you do have that option to opt out, and if you've done that, that's when you might want to skip forward. Sometimes if you opened an account when you were much younger, it may not have been offered to you as default. And in fact, these days, people aged under 26 don't automatically get insurance as a default option, or people with really low balances. So if you worked as a casual or had a break from working with your super fund, you may not have had insurance in it. And of course, if you have a self-managed super fund, you wouldn't have insurance unless you set it up and put it in there. Some people have insurance outside of Super, which they have a preference for, and so therefore it's not going to be relevant to them either. But I really encourage you if you have a retail super fund in Australia, check whether you've got insurance on your account. Now there are three types of insurance available in Super. So that's the first thing. Not all types of insurance can be held in Super. These are the three big ones, doesn't mean you've got all three. Let's start with the first one, the one I think most people understand, and that is life insurance. Sometimes it's called death cover, and it's as simple as it sounds. If you pass away, a lump sum of money is paid to your beneficiaries. But this type of insurance may also have terminal illness cover. And what that means is that if a medical practitioner has certified that you have an illness or injury that you cannot recover from and you're likely to pass away in a short time frame, usually no more than two years, this lump sum may be able to be paid to you whilst you are still living to help cover medical costs associated with that illness or injury. Now, as I said, this is an insurance that's paid as a lump sum to your beneficiary, so important for you to understand what that lump sum amount of cover is that you've got. The second type of insurance is total and permanent disability insurance, also more commonly known as TPD. Now, this type of cover is for when a medical practitioner or two, depending on your super fund, certifies that you have sustained an illness or injury that means that you will permanently be unable to return to work in any occupation. That could be physical or mental health. And this insurance is also paid as a lump sum or an instalment of a number of lump sums. The third type of insurance that you might have is income protection cover. Now you can hold this, in fact, you can hold all three of these covers inside or outside super. There's some particular reasons for holding this one outside of Super at times. But as the name suggests, this provides cover for when you are unable to work due to illness or injury, and it's paid as an ongoing income during that period that you're temporarily unable to work. And the amount of income you receive is usually less than your full salary, about 75%. Super might also be paid, and the duration for how long you receive this income is dependent on the cover you have nominated. So it can be for as low as up to a year, it could be through to age 65. There, they're all sort of different options for it. And as I said, you may not have all of these covers in your super account. You may have opted out or you may have started a new super account and not realized that you hadn't transferred cover over from your old super fund. And what is more of a problem is that you might have super insurance in Super in more than one account. And the reason why this can be a problem is it might be a duplication, and it might mean that the cover that you're paying for can't be used in both accounts. So, particularly income protection can only be drawn from one source inside super. And this is something that you really want to check out that you're not paying for something that you're not going to get the value from. And the amount payable for each of these covers could also differ from what you initially signed up for. So this is really, really common. People put in place an amount of cover or they're given an amount of cover and they don't realize that that amount of cover is likely to have declined as you got older. And it's based on the theory that you need less money the closer you are to retirement because you've paid off debts or other family obligations, or you may have fixed a level of cover and you've still got that cover all these years later, and now you don't need it because of those same reasons. You don't have those debts and those dependents. More worrying as you're getting close to retirement is that if you fix that cover, the amount you're paying for premiums is likely to have gone up significantly from when you first put it in place. So insurance really isn't a set and forget part of your super, and approaching retirement is a perfect time to review what you've got, what it's costing you, and whether or not you need to maintain them. So the first thing I want to say about insurance is that it can be incredibly complicated. It is not apples for apples, so comparing just purely on price or the amount of cover may not get you the result that you want. It is something to be reviewed by a professional insurance advisor, so a financial advisor who's licensed to give insurance advice. And the other benefit of doing that is that, as I said at the start, insurance can be held outside of super that may be more suitable to you. In fact, there may be a completely different type of cover that might be suitable for your circumstances. So understanding and comparing the different types of cover, the value of different insurance premiums, and some of the traps of switching cover is really important to do before you just go ahead and make changes to insurance in your super. So some of the factors that I think you need to know about when it comes to this insurance in your super. The first is that all cover is subject to an age expiry. So I don't know of an insurance cover that you can hold until death, if death means that it might come in your 80s or 90s. So most insurance cover runs out about age 70. You might find the odd exception to this, but getting cover is generally going to phase out at about age 70. And for some super accounts, it might phase out from as early as age 50, particularly legacy accounts. So, in general, somewhere between 60 and 70, some of your insurance cover might start expiring. People don't realise that. So you need to check how long you've got cover for and make sure it matches with your expectations. Now, age expiry is for a very good reason because the more likely we are to have a serious illness and injury increases as we get older. And the cost of cover would honestly just get prohibitive. So even though we would all like to have insurance cover in case something went wrong to account for potentially extra costs or to look after our family, it just simply wouldn't be affordable. And as we get older, the other challenge we have is trying to get that cover if we don't have it already. And one of the reasons for this is the next factor that I want you to think about, which is called pre-existing health conditions. And that is where it's either already been identified by a medical practitioner that you have an illness or injury that could get worse over time, or could contribute to another impact on your health, or you have a family history of a condition, or you have a lifestyle habit, whether it be something like smoking or obesity, all of these things are going to be taken into account when you apply for new insurance cover or try to increase insurance cover. So it's going to be this aspect is going to be far more problematic as you age. And what it can result in is that insurers either decline to insure you at all, or they exclude the very conditions that you're worried about, or they significantly increase insurance premium costs because of the added risk of that condition. So age and pre-existing medical conditions can combine to make it prohibitively expensive or unavailable to us, no matter how much we want insurance cover at retirement. But the last factor that I want you to consider is that at least two of these three covers relate to being able to work. And these covers are offered in Supra, it was part of a deal way back when with the unions and the government to protect people that if their working life was cut short, either temporarily or permanently, it was likely to have an impact on retirement savings. So once you've made a decision to stop working either on a permanent basis or reduce it significantly, you then need to consider do I need to protect my ability to earn income? It may not be relevant for you at retirement. It also may not be available to you. You really need to check the conditions, particularly of income protection. You can't protect income that you don't have. And there are certain types of income that may be excluded from an income protection cover. So once you're getting out of mainstream employment, you really need to look at whether that income protection cover is actually adding any value to you, and in fact, whether you're paying premiums for something that is just not going to pay out. Even with TPD, you are not working, have no intention of working again, is that going to be problematic trying to claim on not being able to work in the future? Now many people might consider, well, then do I cancel my insurance altogether at retirement? And it's not a decision to take lightly. I mean, obviously, as I've said, the main issue for older people is that if you do cancel your insurance and then change your mind, it could be very difficult to reinstate it, and it could bring up that issue of those pre-existing medical conditions not covering you for the very things you wanted for. So if you did decide to return to work at any stage, your ability to have insurance may be lost. So I think this is an important time to talk about these sort of issues with your family who might have as much of an impact as you do from not being able to cover income, employment income in the future. Now, if you go and seek financial advice to help you with making a decision to retain insurance, get new insurance, or cancel insurance, then one of the things they're likely to do is an insurance needs analysis. And this might also be a tool that you can find online offered by your super fund to give you a bit of an idea as to what your need for insurance is. And that analysis will look at some of the following factors. The first one is your income itself. So with the money that you currently earn, do you spend it all? Or do you have a surplus from your take-home pay? So what are your income needs? What's the absolute minimum you could survive on? Because remember, as I said before, income protection will not cover your entire income. It's unlikely to cover your entire entire income. So understanding what your base minimum income need is, and that's going to be directly related, of course, to expenses. And this is where younger people have expenses that they can't or don't want to avoid if they couldn't continue to work. Looking after dependents, paying off debt, making sure their family has the lifestyle that they wanted, you know, if they want the kids to have further education and be able to contribute to it, etc. They'll also be looking at assets you own, which includes your super and potentially your house, to understand what funds you might have available to cover a loss of income or any lump sum costs related to, say, medical costs. And as I've said just earlier, they'll be looking at liabilities that you have outstanding, so all loans, all ongoing debt obligations to understand whether you could continue to pay them off or what you might need to pay them out in full should something happen to your ability to earn income. And of course, they'll be looking at any potential health conditions to see how easy or otherwise it might be to get insurance or what that might mean to you if you lose your insurance. Now, going through this exercise will be really helpful to understand if you need insurance and in what form, and it might give you the confidence you need to cancel cover if that's where you're sort of heading it at the moment when you think about retirement. But I will say that insurance is deeply personal. It can't always be judged just on a financial need. Some people view something like death cover as a way of ensuring their beneficiaries don't have any out-of-pocket costs, say for a funeral, if you pass away unexpectedly, or something was to happen to you that required ongoing medical care. And also, some people want to provide a legacy for family members. Just be careful though that insurance is a safety net, a fallback plan to cover you if things go wrong. What you don't want to do is try and use insurance to improve your circumstances because the trade-off there with the cost of holding that insurance may not be as beneficial as the fact that you may never draw on that insurance. So we don't know what's going to happen in the future, and you are it's a bit of a roulette will as to whether or not you'll ever use this insurance, and it does come at a cost. So that's why I think it's a really important time as you're approaching retirement to think about do I need that insurance I'm paying for, whether it's inside Super or outside of Super, and it's a really good one to include when you're coming to talk to a financial advisor about your retirement planning. So a quick uh call to action there at the end of this topic is go away today, get your super account out and have a look at what insurance cover you hold and what it's costing you, what kind of benefit you might get from it. And if you have the time, and I greatly encourage you to do this, have a read of that insurance guide or product statement that you get from your super fund and understand exactly what you're covered for. And do that before you go and meet with a financial advisor and have a think about the answers to those questions in an insurance needs analysis to make sure that it's really meaningful to get an answer for you about your insurance need. And please, before you change super accounts at retirement, like thinking about starting a retirement income account, which we're going to cover in the next topic. Before you do that, understand how your insurance might be impacted. So that's it for this topic. I look forward to seeing you in topic four, which, like I said, will be about retirement income accounts.