Responding to concerns that compulsory life and disability group insurance coverage eats away small superannuation balances, the largest industry super fund AustralianSuper has introduced an opt-in policy for new members aged under 25. Instead of receiving automatic coverage in their default fund, these new members will only be covered for death and total and permanent disablement if they choose to be.
This initiative will benefit people who don't receive large employer super contributions including students and part time workers without dependents as well as those with multiple small superannuation accounts from different employers. Having multiple small accounts has never been an efficient way of accumulating retirement assets, especially after the government removed the fee protection for small accounts.
The onus is thus placed fairly and squarely on individual workers to take an interest in making best use of their compulsory employer super but it means that especially for younger people, their superannuation coverage can receive the attention it deserves.
Relying solely on the minimum compulsory death and disability cover provided by many funds will provide inadequate benefits should a major injury or health problem emerge. The purpose of insurance is precisely that of covering the serious risks that can and do arise.
The objective is to obtain the desired level of coverage at the lowest possible cost. Also, because the costs involved increase with the risks involved, applying for and obtaining coverage is cheaper and easier when there are no major problems.
Although insurance premiums will reduce the rate of growth of super balances, obtaining needed coverage in a super fund has several attractions. First, it gives access to lower cost group cover with no or low agent fees. Second, coverage in personal names doesn't attract a tax deduction except for income protection insurance which, when called upon, is included in taxable income.
Third, and most importantly, the premiums are paid from the account balance in the super fund and don't reduce personal disposable income. Given that super is tied up untouchable until age 60 or later retirement, obtaining insurance coverage in a super fund is both tax effective and more affordable than coverage in personal names.
Determining the desired level of coverage isn't always easy. As a rule of thumb, the larger the household commitments, the larger the required level of coverage will be. When there are children, coverage of both partners will provide protection to cover the additional costs of invalidity or death of a low or non-earning partner.
The need for insurance coverage will fall as super account balances increase but given the relatively small balances of many fund members, having adequate insurance coverage is an important issue for many Australians.
Daryl Dixon is the executive chairman of Dixon Advisory. firstname.lastname@example.org