Critical cover: protecting the interests of the individual

It is one thing to build wealth through superannuation and savings, but it is another thing to protect that wealth. A key role of personal insurance is to protect an individual’s wealth by providing a benefit for the individual or their family, should something severe occur — death, injury or a critical illness.

And while we insure our car, house and other valuables, we do not always protect our life, wellbeing and that of our families.

Any of the these three major personal events can quickly cause built-up wealth to evaporate. Death can leave a family without income, injury can sharply reduce short and long-term earnings and critical illness often drains away accumulated savings and investments.

Most superannuation schemes offer a life insurance component. But the amount of cover is rarely enough and it doesn’t always extend past simple life cover. Very few in-super policies today are sufficient to cover the average mortgage.

And, in-super policies will probably not offer critical illness or trauma cover. This form of cover pays a cash lump sum immediately on diagnosis of a defined illness which can be used to allow the sufferer to maintain their wealth through recuperation.

Income protection benefits are often available through superannuation although payments are usually restricted to two years, which in the case of long-term disabilities obviously falls well short.

With the introduction of superannuation choice of fund, the issue becomes more complicated. While there are some advantages in having life insurance contained within a super policy, there are also disadvantages.

Let’s start by reviewing the advantages.

The principal one is an automatic acceptance under group cover structured through employer sponsored super funds. The individual is not required to go through the underwriting process and sometimes extensive medical checks. This can be a crucial factor to consider especially for individuals who would have trouble getting insurance cover due to their medical history. Group cover is also often cheaper.

Another advantage is in having some death payments made as pensions rather than lump sums. This may be more suited to a beneficiary who cannot contribute to super to have a death benefit paid in this manner or simply someone who doesn’t want to receive a lump sum. If pensions are paid to children under 18 these payments are not counted towards their reasonable benefit limit (RBL) and therefore there may be tax advantages as they will receive a 15 per cent rebate.

For the self-employed or substantially self-employed , insurance in super may be more tax advantageous than insurance outside, as the individual could receive a deduction for making a contribution to a super fund. Not all personal insurance premiums receive the same favourable tax treatments.

However, there are potential disadvantages. They are mostly tax and RBL related.

The major ones being the possibility of tax payable on a payment made out of super and the risk of excessive tax liabilities if the death benefit payment exceeds the deceased’s pension RBL.

Another issue is in some instances, payouts of death benefits may be restricted to the estate or ‘dependants’ which may disadvantage some. Furthermore, conditions which qualify for payment under an insurance definition may not meet Superannuation criteria and therefore may not be immediately released to the member.

However, the biggest dangers for a person who decides to exercise super choice is they may lose group cover and have to undergo a full underwriting process.

Losing group cover can add substantially to your premium if the applicant is in a senior age group, a higher risk occupation, or takes part in riskier recreational activities.

Undergoing a full underwriting process can also be a significant challenge for people who have a pre-existing condition. Asthma suffers are an example while a person with diabetes may find the requirements even more stringent.

The other issue to be considered in super choice is that some of the benefits may change. Terms and conditions vary from policy to policy and that some more favourable terms in one policy relating to salary continuance, can be unattractive in another.

And these are only some of the issues involving insurance and superannuation. Financial protection is rarely straightforward and generally requires expert advice. For a comprehensive review of insurance and superannuation issues any potential chooser under super choice should seek professional advice.

Jodi Murray and Carly O’Keefe are insurance specialists with Tower Australia