Updated March 06, 2015 16:51:23 Life insurance from.
Life insurance is something everyone with dependants needs, but it's not cheap.
In an ideal world we would all have death benefit, total and permanent disability (TPD), income protection and trauma insurance (which is also known as critical illness insurance and pays a lump sum on the diagnosis of a range of serious conditions such as heart attack, stroke, multiple sclerosis and cancer).
The reality though is that type of comprehensive cover costs thousands of dollars a year, which most people can't afford.
The result is we have to make a choice. Most go for death benefit insurance, but even that can be expensive.
It's why, according to ratings agency, Canstar, 83 per cent of people sign up for the default death benefit cover offered by their superannuation fund, which can be much cheaper.
The reason for that is superannuation funds buy policies in bulk and get a discount from the insurance company. You also pay for insurance in your super fund with pre-tax dollars whereas when you buy insurance outside your super fund you use after tax dollars.
Throw in the fact that insurance inside superannuation will often have automatic acceptance (which means you don't have to go for a medical or reveal pre-existing conditions), and it can also include TPD and income protection, and it sounds like a very good deal.
Often there will be limits on the death benefit, say $100,000 or $200,000, when actually your loved ones might need a million dollars to pay off the mortgage, cover school fees and maintain their lifestyle.
Income protection insurance inside superannuation is normally for two years. If you are seriously ill or injured, you may need your cover to last a lot longer than two years.
You also need the right type of income protection insurance. Some policies will pay out if you are unable to do your own job. Others won't and you will be forced into another occupation. Income protection in superannuation may not give you a choice.
Another disadvantage is that if you die, and your life insurance is inside your super fund, the insurance payout is not guaranteed to go to your partner or other dependants.
Beware of the impact on retirement savings
The insurance money will be paid to the super fund, and unless you have what's known as a Binding Nomination on your super, the fund trustee has some discretion as to where it goes.
And further on that score, if money is paid to someone who is not a dependant (like an adult child) that person may be landed with a hefty tax bill. Lump sum payouts from life insurance taken outside super are tax free.
But the biggest issue with having life insurance inside your superannuation fund is the potential impact on your retirement.
The aim of superannuation is to provide income for your retirement but every dollar of your superannuation savings you spend on insurance equates to many dollars you will not have when you stop working.
If you are spending thousands of dollars a year over many years, your retirement lifestyle could take a big hit. Those overseas holidays you were planning may no longer be possible, or worse!
It's very important if you have insurance inside your superannuation fund to increase your super contributions to cover the cost of the insurance.
If you can't afford to do that you probably need to contact your super fund or financial adviser and get an understanding of what impact on your retirement the insurance payments will have.
Level term life insurance comparison
We need to be properly insured just as we need our superannuation to do its job in retirement.
Taking insurance through super can be a good strategy to lower the cost.
The key is getting the balance right.
First posted March 06, 2015 16:46:11