Group Life Insurance in Superannuation

All working Australians will hold superannuation in one form or another.  Whilst we have the choice to place our super with any provider we choose, or even to manage our own funds, many Australians still have an industry fund or an employer sponsored fund.

In many of these industry and employer sponsored super funds there will be automatic inclusion of life insurance.  There are certainly some benefits with this structure, however there are some major issues that must be considered before you decide whether or not this insurance structure is right for you.

Life insurance held in this manner is generally known as ‘group life insurance’.

Benefits of group life insurance

Essentially there are two main benefits with holding your life insurance within an industry or employer fund.  First up, most funds will provide automatic acceptance up to certain limits.  This means that you do not have to undergo any medical or blood tests, and you don’t even have to complete an application form in most cases.

The second benefit is cost.  Generally speaking, the premiums for group life insurance will be cheaper than the price of obtaining ‘retail’ cover through a financial adviser or directly from the insurer.  The reason for this is that your super fund is buying the insurance in bulk and can obtain significant group discounts.

Despite these benefits, there are a number of issues to consider, and they can have a major impact on the financial outcomes for your family in the event of your passing.

Issues with group life insurance

Although you will generally not require medical tests or blood tests for group life insurance, the downside is that the levels of cover can be very restrictive, and may not appropriate for your needs and objectives.

Although industry super funds have improved their insurance offerings over the last few years, in some funds you will find yourself restricted to around $250,000 in cover.  Given the average mortgage size in Australia, this maximum may not be appropriate for many Australians.

In most cases the insurer will also reduce the amount of cover as you get older.  Using one of the largest industry funds as an example, their standard maximum cover of $250,000 is only available up to age 40, at which time it will reduce to $186,000.  At age 50 it will reduce to less than half of that at $83,000, and at age 60 it will drop all the way down to $25,000.

It’s fair to say that these amounts would fall grossly short of the actual life insurance needs of most Australians within those age brackets.  You can top up these amounts by taking out a second life insurance policy outside of your superannuation, but having multiple life insurance policies can add further complications and costs.

Control of your life insurance payout

When you hold your life insurance within any superannuation fund, the insurance is actually owned by the fund and not by you.  In the event of a claim, the claim proceeds will initially be paid not to your estate or your loved ones, but instead to your super fund.

In most cases this is not such an issue, as once your life insurance claim has been paid into your super fund, the full amount combined with your super balance will then be released to your estate and onto the people who need it most, which of course are your family and loved ones.

Whilst this is the case most of the time, there can be complications.  Although your super fund will allow you to nominate who your insurance and super proceeds are paid to, under a standard nomination the super fund is not actually bound to pay the funds to that person.

For example, if you have nominated a person who is not related to you to receive your life insurance benefits, the super fund trustee may override your nomination and will instead pay the benefits to a current or former spouse.

This issue can be overcome through the use of a ‘binding nomination’ however these must be renewed regularly and not all industry super funds have the ability to accept a binding life insurance nomination.

Comparing apples with apples

In addition to the issues we have covered so far, there are a number of other differences between group life insurance held with your superannuation, and retail life insurance obtained through a financial adviser or direct from the insurer.

Group life insurance is generally a very basic policy with most of the extra features and benefits stripped out.  The reason for this is twofold; firstly to reduce the premiums to a minimum and secondly due to the restrictions put in place by the Superannuation Industry Supervision Act 1993.

Benefits not available with group life insurance include the following:

• Financial Advice Benefit – A payment of up to $2,000 to allow your loved ones to obtain financial advice on how to best utilise your life insurance payout.
• Accommodation Benefit – A payment of up to $150 per day if you are confined to a bed due to a terminal illness.  These funds can be used to pay for accommodation to ensure your loved ones can be close to you during this stressful period.
• Child Cover – A payment of up to $150,000 if a child dies or suffers from a listed critical condition.  These funds are commonly used to fund treatment and to allow you to take time off work when you need it most.

The specifics of these benefits do vary from one policy to the next, but in most cases they are included free of charge as a standard benefit.  They are only available in a retail fund however, and not within group life insurance.

There are many areas to consider when deciding on the right type of life insurance.  Group life insurance is generally cheaper and has an easier application process, however it also has some fairly major limitations in terms of the amount of cover and the benefits available.

A retail life insurance policy on the other hand will give you more control over how much you are covered for and how that cover is distributed at claim time.