Check Your Super For Life Cover

Sydney Morning Herald

Wednesday October 10, 2007

Anne Lampe

Nearly all super funds provide life insurance - for death and total and permanent disability - which is paid out of super contributions. But ask anyone how much insurance they have and the answer is likely to be "I wouldn't know". Most people are more preoccupied with their fund's investment returns.

Susan Fairley, marketing manager of AustralianSuper, says the average member ends up with the default insurance option which used to be one unit but has since been upgraded to three units because members were being left under-insured.

Under the old scale, a standard unit cost $1.95 a week and bought between $54,000 to $125,000 cover depending on occupation, with the amount reducing at older ages. Under the new scale, it costs $3 for three units a week with the amount of cover increasing to between $125,100 and $252,600.

The payment of premiums out of fund contributions means they are tax efficient. For industry super insurance, the premiums are also commission-free.

Most funds provide a choice: pay the same premium each year but the cover reduces or pay a rising premium to maintain the level of cover.

How much you need depends on your circumstances. If you are young, have few debts and no family, you may not need insurance. Or you can opt for the minimum to pay for funeral expenses in the event of accidental death. Most funds will allow you to opt out of insurance until you need it. But once you have a mortgage and family obligations - children to feed and educate, and perhaps a non-working spouse - the amount required rises rapidly. At this point your income is vital to the family's financial wellbeing and its replacement, if you die early, is vital.

As you near retirement - and the mortgage is repaid, children leave home and your super balance builds - the amount of death cover required falls. Funds usually stop providing it when you reach 65, or if you retire earlier.

Most funds have a calculator into which you key income, debts and years to retirement to help you work out how much you need. The Australian Financial Services Directory provides a calculator on www.afsd.com.au.

Generally, a limited amount of cover can be obtained without a health check but higher amounts will involve a medical.

Rice Walker Actuaries, which recently surveyed insurance for the Investment and Financial Services Association, concluded that couples in their mid-30s with young children required death cover equivalent to 10 to 13 times their annual taxable earnings, depending on their partner's earnings.

For part-time workers, the multiples are higher. For full-time workers in their mid-40s with older children, the range was six to nine times taxable earnings.

That means for full-time workers on average earnings, the amount of cover required for those with young children is $500,000 to $650,000. Those with older children are looking at about $300,000 to $450,000.

Sandy Grant, the chief executive officer of industry super fund Cbus, says the minimum cover required is an amount that pays off all debt, and if there is no mortgage, is sufficient to buy a modest house.

His fund enables members in the high-risk construction industry to buy six units of cover up to the age of 51, or $300,000 for $11.70 a week, without a medical. The amount covered reduces after 51.

The default option for cover is two units, or $200,000, increasing up to $500,000 with a health check.

Premiums for blue-collar workers is higher than for white-collar counterparts in the industry.

© 2007 Sydney Morning Herald

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