Most people automatically receive insurance cover when they join a super fund, but how do you know this cover is the right level for you?
I am often asked by people if they have the right amount of insurance. As you would expect my answer is nearly always, “it depends”. The truth is I don’t have enough information to answer the question. However, ask an individual this same question, and they would equally be unable to answer through having insufficient information. This is because individuals only know their personal circumstances and typically financial experts only possess the technical know-how.
With a few pointers you can learn the basic financial information to determine how much insurance is right for you. So let’s look at the different life insurances you can get through your super and what things you should consider when choosing the level of cover you need.
Income Protection (IP) Insurance
As the name suggests, this insurance provides you with replacement income should illness or injury prevent you from earning your normal income. The most important thing to understand about Income Protection insurance is that the law only allows you to claim Income Protection insurance of up to 75% of your pre-tax earnings. With this in mind it’s quite easy to understand how much Income Protection insurance you need.
Generally, you should have Income Protection equal to 75% of your earnings. Obviously, if you have uncertain income or are self-employed its not this simple. In these cases I would suggest you use one of the free to use advice services outlined at the bottom of this article.
The more complex aspect of Income Protection is understanding and selecting the right waiting period.
The “waiting period” refers to the time from when the injury or illness first commenced until you can claim the insurance. I.e. A 60 day waiting period means insurance won’t be paid unless the illness or injury continues to prevent you from working for more than 60 days.
The shorter the waiting period the more expensive the insurance premium, so if you can have a longer waiting period you will be saving money.
When considering the right waiting period for you, consider how long you can cover your expenses without working. There are a few things you should think about here:
- What leave do you have that could be used should you be unable to work, i.e. sick leave, annual leave, long-service leave, etc.
- What savings do you have that could be used to cover your expenses if you stopped working.
Once you understand these you should be able to determine whether a 30 day, 60 day or 90 day waiting period is best for you.
Life Insurance (often also referred to as Death Cover) provides a once-off payment to your dependants should you pass away. This payment is in addition to your existing super account balance.
Like all insurance it’s important to have the right level of cover. Too low, and your dependants may suffer further pain from stressful financial aftershocks. Too high, and you may be eroding too much of your retirement savings, preventing you from living the retirement you are called to.
So, how do you determine the right amount?
Start by asking yourself (and dare I say discuss with your spouse/family), ‘what burdens do I want removed for my family if I were to pass away?’
- Maybe you want to have the mortgage paid off. Or, maybe you want to cover 5 years of the rent on the family home.
- Maybe your children are at a local Christian School and you don’t want the costs to force the children out of their school community.
- Maybe you want to ensure your spouse has time away from work to re-adjust by having enough money to cover household expenses for 6 or 12 months.
- Maybe you want the family to have a great holiday, creating new joyful memories to in a small way offset the grief of loss.
These are just a few examples of things you may consider when reviewing your level of life insurance. Many of these considerations are at their highest for middle-aged individuals, however these needs will generally reduce as retirement approaches. For this reason it’s important to review your insurance every 5 years or so.
Once you have considered these things you need to put a value on each item, then add the values together to come up with a total. If you do this exercise and find the total value exceeds your current superannuation balance, you can use life insurance to fill this gap.
Disability Insurance (also referred to as Total and Permanent Disability Insurance or TPD Insurance) provides a once-off payment should you be assessed as being Totally and Permanently Disabled.
The word ‘Total’ in Total and Permanent Disability insurance refers to an assessment on an individual’s ability. Generally the focus is on assessing if they are totally unable to work, as opposed to someone who is able to work or partially able to work. The word ‘Permanent’ in Total and Permanent Disability insurance refers to an assessment of the enduring nature of the disability. That is, a doctor would need to assess that the total disablement will continue for the rest of the individual’s life.
With this in mind how do you know how much TPD insurance is right for you?
Again it’s easiest to answer this by considering another question: what financial burdens would arise if I were to be unexpectedly disabled?’
- Presumably you could no longer earn an income, what would this mean for covering your family’s living expenses. How long would your family need to adjust to this change? 3 years? 5 years? What income would you otherwise earn in this time?
- What about additional costs associated with the disability – medical treatment, ongoing medical care?
- What about additional domestic support – child care, cleaning, etc.
- What about modifications to your house or car, or maybe the need to purchase a new specialised vehicle to travel.
These are just a few of the examples of things you may consider when reviewing your level of TPD insurance. While many of these additional ongoing costs are covered by government programs, there will be a significant adjustment period that you and your family will need to consider.
Once again you need to put a value on each item, add the values together to come up with a total value. If someone does this exercise and finds the total value exceeds their current superannuation balance, there is again the option to fill this gap with TPD Insurance.
Still Need Help?
If you feel uncomfortable determining the right insurance for you or you have further questions, we are here to help. At Christian Super we have a couple of different services that can provide you with a personal recommendation on your insurance needs. Best of all these services are free to use.
The first option is our self-service advice system, SmartAdvice, which you can access by logging into your Christian Super MemberAccess account online. Complete a simple questionnaire to receive a recommendation about the level of insurance you might need.
Alternatively, if you really just want to talk it through with a professional, you can contact our Member Care Team to arrange an appointment with a licenced advisor who can recommend the right level of insurance for you.
– Nathan Buttigieg, Chief Member Officer
Disclaimer: The content of this article includes advice that is general in nature and does not consider your personal situation. Christian Super encourages all people considering their options in retirement planning to seek out qualified professionals who can provide specific personal advice.