From 1 July 2019, superannuation fund members with inactive accounts risked losing their insurance coverage unless they actively opted-in to retain their cover. Before end of the financial year, more than one million Australians received letters requesting an opt-in response. Those that did not respond in time may have forced any cover they previously held to lapse.
As a result, a large number of Australians may now have no Life, Income Protection or Total and Permanent Disability (TPD) insurance cover. This leads to the obvious question of ’how much cover should a person or family have?’
Unfortunately, most Australians have never completed a comprehensive insurance needs analysis. Here, we look at the protection needed for the person taking out cover, as well as the needs of those left behind and their dependents.
Insurance needs analysis
An insurance needs analysis is a robust and comprehensive process that considers not just your immediate needs, but how that cover must provide for you and your dependents in the event of a claim.
Personal insurances are traditionally a combination of coverage for varying amounts taken out at a specific time to suit a need. Once the policy is ‘in force’, it is generally left to increase year on year with inflation, regardless of any changes to the circumstances that necessitated coverage to begin with.
Having the incorrect levels of insurance can be costly to the policyholder; they either pay too much in premiums, or do not receive enough payment to cover their needs if a claim is made. In our experience, over and under insurance often occurs where clients receive default insurance through their employment. This cover often has little or no correlation to their circumstances; the amount is often based on a limited metric, such as three or four times their annual salary.
Indeed, the latest Underinsurance Australia report, recently released by independent consultants and actuaries Rice Warner, highlights that ‘the median level of life cover meets just 28% of the amount needed to ensure family members and dependants can maintain their standard of living after the death of a parent or partner.’
We recommend that a comprehensive review take place every year before your insurance premiums become due, to ensure that any changes in your circumstances are reflected in your levels of cover.
Balancing affordability with conditions of release
Once a comprehensive needs analysis has been conducted and the level of coverage ascertained, your insurance specialist should then look at the structure of the policies to ensure they suit your cash flow needs; they should also assess the conditions of release in the event of a claim.
TPD inside of your industry or retail super fund is commonly held as ‘any occupation’ policies. This means if you are found to be incapacitated but still able to complete any type of paid employment, you may not meet a condition of release. As a result, the claim is paid to the super fund but not passed on to the beneficiary.
Recently, some industry funds have tightened their definitions around TPD policies to restrict payments to beneficiaries if you are able to be trained to perform another role. Other changes that have come into effect resulted in some industry funds being able to withhold payment to beneficiaries if the super balance was below a certain level, and/or no contributions had been made in a certain period.
Changes in definitions like these, although not frequent, highlight the importance of a comprehensive review each year.
Insurance and superannuation
Insurance held inside a super fund isn’t always a bad thing; structuring policies both inside and outside of super can allow you to meet your coverage requirements without the cash flow impact on the family budget. Default coverage can sometimes provide some protection if you have health issues that affect you obtaining more robust cover elsewhere.
However, it is important that your superannuation is in order. Having several super funds may mean paying multiple insurance premiums, which will deplete your super balances quicker and reduce the income available to you in retirement.
Talk to an expert
Tailoring insurance policies so that the needs of the entire family can be provided for is a complex but important part of receiving specialist insurance advice. We understand the additional complexities that families with loved ones on the spectrum need to plan for. One Wealth Advisory has many years of expertise in advising and implementing insurance and superannuation strategies and is a long-time supporter of Autism Awareness Australia.
We are offering an entirely complimentary consultation to all Autism Awareness Australia supporters. This is to provide a comprehensive insurance needs analysis and a review of existing insurance and superannuation arrangements. We hope that having everything in order will provide peace of mind.
To receive your free consultation please email me at [email protected]
Director – Financial Adviser
One Wealth Advisory