Retirement
How does insurance in super work?
Most super funds include some level of insurance cover for their members at lower costs, but the coverage may not always be appropriate to the members’ needs.
How does insurance in super work?
To ensure that you have the appropriate level of insurance cover, it’s important to understand how insurance in super works.
Here’s what you need to know.
Is insurance compulsory in superannuation?
Insurance isn’t compulsory in super, but some people choose to opt in for the default cover because its premium and fees may be cheaper compared with retail insurance.
This is because registrable superannuation entities (RSEs) may have a large number of members – the promise of a potentially large number of policyholders enables them to negotiate better terms under a group policy.
What does super insurance cover?
Group policies typically provide coverage and benefits that all or majority of the members may need.
Since super funds are composed of members of varying ages and circumstances, the “safest” and cheapest coverage for all is to provide the bare minimum, which means some may be underinsured.
Request for more coverage is always an option, but experts argue that while insurance in super may be cheaper, it may become more expensive once you adjust the coverage. This is an important point to consider since your insurance coverage needs will change along with your personal circumstances (i.e. career, marriage, kids etc).
For instance, the group insurance may offer total permanent disability insurance and income protection cover but may not pay out for redundancies and certain job industries.
Likewise, group insurance tends to require a long waiting period before the provider pays out – as long as one year from the time you submit a claim.
Is it wise to pay life insurance via your superannuation?
Insurance in super is paid using your balance. This means you may not be able to maximise portfolio growth because the premium and applicable fees are automatically deducted from your account regardless of how much your contribution is.
If you’re considering holding insurance within your super, ensure that you’re fine with paying with your super balance.
Furthermore, evaluate the default cover and whether it can meet your potential needs should you need to make a claim.
Are there protections for members with insurance in super?
The Protecting Your Superannuation Package amendment places limits on the fees and insurance charges of inactive super accounts effective from 1 July 2019. This change was enacted to avoid balance erosion.
The amendment requires RSEs to terminate insurance cover for low-balance and inactive accounts. Low-balance and inactive accounts refer to accounts that have a balance below $6,000 and have not received contributions for at least 16 months.
If you wish to keep your insurance cover in super, you need to avoid account dormancy by paying contributions. However, if you simply wish to keep the insurance cover despite a low-balance account, you must contact your fund manager to opt in.
Explore nestegg to learn more about Superannuation.
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