Insurance is one of those things in life that we know is really important but that often gets forgotten or pushed to the back of the queue in our busy lives.
We’re generally aware we need to have insurance in place for our cars, house and contents and healthcare needs, even if we’re not always totally up to speed with the policy details.
But do you have insurance in place to cover your family’s costs in the event of your death? What if (heaven forbid) you become permanently disabled and are no longer able to work? What would happen then?
Many insurance companies offer standalone products to cover these events. You’re also probably aware that it’s common for life insurance – as well as total and permanent disability (TPD) insurance – to come bundled with your superannuation.
Life insurance policies pay out to your nominated beneficiaries when you die, while TPD insurance provides a lump sum payment in the event that illness or injury renders you unable to work.
They are often a cheaper option to standalone insurance policies because the premiums are taken from your super contributions. This also means your premiums are being paid from your pre-tax income.
Most people, then, would assume they’d be adequately covered if the unthinkable were to happen. But you might be shocked if you looked at the fine print on your policies at the level of your cover, especially if you’ve opted for the default options.
Data from Rice Warner’s Underinsurance in Australia 2020 report shows Australians hold enough insurance to cover 92 per cent of basic life insurance needs, but only enough to cover 29 per cent of total and permanent disability (TPD) costs.
“The number of Australians with total and permanent disability cover (TPD) and income protection (IP) is significantly lower than life cover and Rice Warner reported this was due to most people holding life insurance cover through their superannuation, and some funds not offering TPD or IP as a default,” Canstar reports.
Figures from the Australian Securities and Investments Commission (ASIC) show that 64 per cent of Australians who hold life insurance and TPD policies, do so through their super fund. This means the default insurance options for most Australian super funds are only offering low or, in some cases, no TPD cover. Why is this?
Life insurance is pretty straightforward, paying out only when the policy holder dies but TPD insurance is much trickier, as it is more likely to have to pay out. When it comes to TPD policies, there are two basic kinds – ‘own occupation’ cover and ‘any occupation’.
Own occupation cover will pay out in the event that you are no longer able to perform the job that you currently have. This type of cover is considered more comprehensive and is more expensive than the other option.
Cover for ‘any occupation’ has a much higher threshold that must be met before it will pay anything out. You need to be physically unable to perform any job at all before a claim will be paid. There are obviously a wide range of different jobs (and wages) out there, many of which might be enough to sustain your current lifestyle.
“The disability cover inside super is largely defined as ‘any occupation’,” David Simon, principal of Integral Private Wealth, told TND.
Unfortunately, people often assume the TPD insurance they have with their super uses the ‘own occupation’ definition of total and permanent disability.
If your life or TPD insurance is through your super fund, make sure you read the product disclosure statements (PDS) carefully. There are often quality insurance options available through your fund, but they usually aren’t the default options, so it pays to investigate what your fund has to offer.
MoneySmart says that when checking the level of cover you have with your super, it’s a good idea to check for any exclusions in the policy for pre-existing conditions or high-risk occupations.
“When reviewing your insurance in super, see if there are any exclusions or if you’re paying a loading on your premiums. A loading is a percentage increase on the standard premium, charged to higher risk people. For example, if you have a high-risk job, a pre-existing medical condition or you’re classified as a smoker.”
Do you hold life or TPD insurance through your super fund? Are you aware of what it does (and doesn’t) cover? Let us know in the comments section below.
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