Insurance in super: Is your cover adequate?

Insurance coverage through superannuation is common, and many believe they are adequately protected. However, an unexpected event might reveal insufficient coverage, often too late to rectify.

A recent client, Sarah, a 38-year-old stay-at-home mother with three young children, faced such a scenario. Her husband, Bill, was killed in a car accident. Bill had life insurance through his superannuation but had not sought professional advice. He estimated the coverage amount himself, resulting in an inadequate insurance payout. Although Sarah received Bill’s superannuation, its value was modest due to Bill’s young age.

Referred by another client, Sarah sought advice on managing her finances. She was looking for work but had to rely on the insurance and superannuation proceeds, including paying off her mortgage. Sarah’s situation is common. According to Rice Warner, over 70% of Australians have life insurance through superannuation funds, yet under-insurance is a significant issue in Australia. Many assume their fund’s default coverage is sufficient without seeking professional advice.

While some insurance is better than none, and superannuation-based insurance is convenient, there are pitfalls best navigated with professional advice. One crucial point is that part of super contributions goes towards the insurance premium, potentially reducing retirement savings more than anticipated. Regular reviews of insurance coverage, like other financial affairs, are essential, especially as family and financial circumstances change. Seeking advice from a professional who understands individual circumstances is crucial.

Many clients are surprised by the gap between their actual insurance needs and their coverage after professional evaluation. Even non-earning partners should be covered, especially when dependent children are involved. More coverage means higher premiums, but better coverage is often preferable to discretionary spending.

A contrasting case involved Tim, whose wife, Maria, 43, died from a brain aneurysm. Years earlier, comprehensive insurance coverage was arranged for both Tim and Maria, within and outside their superannuation. Tim’s claim on Maria’s life insurance allowed him to pay off their mortgage, credit card, and car loan, and afford a part-time nanny for their two children. Although devastated by Maria’s loss, their financial situation remained stable.

The difference between Sarah’s and Tim’s situations is stark. However, Sarah has since found a job, and with professional help, has created a realistic budget and restructured her mortgage. While recovery will take time, her outlook is improving.

(Names have been changed.)

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