Uncomfortable truth hiding in superannuation insurance

I saw a screenshot that shocked me last week.

It was shared in the Equity Mates Facebook Discussion Group – where listeners swap ideas and answer each other’s questions.

One listener, Mat, posted a notice from Australian Super outlining changes to insurance premiums.

Life insurance premiums were up 20 per cent.

TPD (Total permanent disability) premiums were up 40 per cent.

Forty per cent. In a year.

That’s not a rounding error. That’s a wake up call.

Because while rising premiums are painful, there is a more uncomfortable fact hiding in most Australians’ Superannuation insurance policies.

Most of us aren’t adequately insured in the first place.

Many Australians are underinsured

When we first sign up to superannuation, often we’ll tick a box for life, TPD and income protection insurance. Or it’s selected for us by default.

Then we never think about it again.

It creates a false sense of security. We think we’re covered if anything goes wrong.

The problem is, it isn’t nearly enough.

According to MLC, around 60 per cent of Australian parents with dependent children don’t have enough life insurance to support their family for more than one year.

Research from Rice Warner found that the insurance cover held across Australia is sufficient to only meet 29 per cent of TPD needs.

Rice Warner separately found that the median default cover of a typical Super fund only meets 65-70 per cent of death cover needs for the average Australian household.

The Financial Services Council estimates that around 1 million Australians are underinsured for Death and TPD insurance and 3.4 million Australians are underinsured for income protection insurance.

My reality check

I used to think I was fine.

Looking at my Super, I had $250,000 in life insurance and $250,000 in TPD cover.

That sounded like a lot.

Then we interviewed Phil Thompson from Skye Wealth on the Equity Mates Investing podcast.

He asked a few very simple questions:

• How much is your mortgage? (More than $250k)

• If you couldn’t work again, how much would your family need to live? (More than $250k)

It didn’t take long to realise $250,000 wouldn’t go far.

Now, I’m not alone.

The Association of Superannuation Funds Australia (ASFA) reports that 71 per cent of Australians with insurance through super are on the default cover.

And according to the ASFA the average sum insured is $228,000.

In 2020, Rice Warner did some modelling for the basic level of death and TPD cover for the average Australian.

It found for young parents, both aged 30, the basic level of death cover required is $561,000 each.

It is important to note that your insurance needs will be dependent on your personal financial circumstances, family situation and huge number of other factors.

But these averages reinforce the key point: for many of us, default insurance cover in super isn’t enough.

You have more choice than you think

One of the biggest misconceptions in Australia is that you’re stuck with whatever insurance your super fund gives you.

You’re not.

You can change the default level of cover your super fund gives you.

You can choose your insurer, your level of cover, a structure that suits your needs and still have premiums paid from your super balance.

Now there is some complexity with getting it set up.

You can speak to your super fund directly, but I would suggest getting an independent third-party to look at it and speaking to a financial adviser.

Because, as Phil explained, when Australians upgrade from default cover in super, “most of the time the policies through the super fund are more expensive than the same underlying insurance provider going through an adviser.”

What every Australian can do

Here’s the uncomfortable truth: insurance is one of those things you don’t think about until it’s too late.

But it’s also one of the most important things we can do to manage the risk of something going wrong in our life.

Even if you think you have insurance through your super, it is important to check it periodically.

So take five minutes. Log into your Super.

Check what you’re covered for and ask yourself one simple question: would this actually be enough if something went wrong?

DISCLAIMER: Information and opinions provided in this column are general in nature and have been prepared for educational purposes only. Always seek personal financial advice tailored to your specific needs before making financial and investment decisions.

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