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In or out? Insurance within super isn't all it's cracked up to be.

Posted by Sean O'Kane & Neal Durling on 27 March 2019
In or out? Insurance within super isn't all it's cracked up to be.

The fields of insurance and superannuation are complex and filled with both options, and opinions. One of the latest (and loudest) opinions involves the recommendation from industry "experts" to take up personal insurance within your super fund.

The case for this stems largely from the default levels of cover that are provided through this process, with no underwriting required, making it simple for the member and cheap to administer for the super fund. Sometimes volume discounts mean premiums are also cheaper, but this isn't always the case. The more likely appeal is the fact that the premiums are debited from your super account so there's no out-of-pocket expense.

While this might sound good in theory, as is so often the case with financial planning, there is no one-size-fits all solution -  the best option for you depends entirely on your personal situation as well as consideration of the facts at hand. It's dangerous for members not to seek advice outside of their product provider (super fund) it means they aren't getting the full picture, including  the positives and negatives associated with their different options.

So what are the obvious problems in relying on the default insurance provided by your super fund?

Well, insurance is a basic concept dating back centuries, involving a group of people having each other's backs. Everyone pays in, hoping that they won't need to claim, but, if an unforeseen event happens, they receive a benefit to help support their family. It's a simple business that collects premiums, pays claims, makes a small surplus for reserves to cover future claims, and ideally makes a small profit for those making the market or taking the risk. Setting the premium is absolutely key for sustainability and needs to reflect the likelihood of claim each individual brings to the pool.

With guaranteed acceptance, which typically  occurs when you purchase insurance through your super fund, this process doesn't occur. As a result, this risk is typically managed in the following ways:

  • generally low levels of default insurance cover, which are likely insufficient on their own;
  • policy terms and conditions that are often more restrictive and difficult to claim on "any" rather than "own" occupation TPD, for example;
  • exclusions or restrictions on some benefits that cause high claims eg mental health;
  • exclusion of pre-existing conditions, meaning you're underwritten at claim time, leading to uncertainty at the worst time;
  • temporary income replacement benefits that are short term and cease if your condition becomes defined as permanent;
  • benefits cancelable by the insurer rather than non-cancelable provided you pay premiums; and
  • premium structures that don't offer the long-term premium savings offered by a level premium structure. 

Insurance through super has its place, just like Centrelink as a safety net has its place. And there are situations where an adviser might recommend this is retained or even extended, but to think it's a simple like-for-like comparison is naive at best. Additionally, if using your super to pay your premium is important for you (and of course there are a whole range of long-term implications of doing this as well) there are ways in which you can pay premiums for external insurance via rollover from your fund. So, contrary to popular belief, you aren't restricted to accepting your particular super fund's insurance product even if cashflow is tight.

If ever there was an area that requires the personal advice of a skilled practitioner who can really compare the pair, this is surely it. Just ask anyone who has had the need to claim.

Author: Sean O'Kane & Neal Durling
Tags: Insurance superannuation

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