Default life insurance premiums could be eating into your super nest egg

While life insurance can be an important part of an estate plan that provides financial peace of mind for your loved ones if you die, staying with the default insurance offered within your super fund could be unnecessarily carving thousands off your super balance by the time you reach retirement.

According to new data from financial comparison website Canstar, insurance held through super can represent a substantial cost over time, and could wipe more than $200,000 off your superannuation balance.

“Many Australians with default life insurance cover in their super may not even realise they are paying for the privilege, how much they are paying for it or what is included in the cover. If their circumstances don’t warrant such cover, it could be needlessly eating away at their retirement nest egg,” Josh Callaghan, Canstar’s superannuation expert said.

Canstar’s investigation found that a 25-year-old blue-collar non-smoking male starting with a $30,000 superannuation balance and an annual income of $60,000 could retire with up to $244,676 more at age 67 if he opted out of the default insurance within his super compared with if he kept it.

“Keep in mind that if you do opt out of the default insurance, it’s unlikely you will be able to opt back in with your current super fund. You will instead need to apply for tailored insurance or if you specifically want default insurance, you would be required to switch super providers,” Callaghan said.

While Canstar’s modelling looked at the impact of using default insurance on a young adult, Baby Boomers have different insurance needs and considerations later in life. Some insurances can be more difficult, or impossible, to get when you have pre-existing health conditions or complicated health issues – but it’s still worth reviewing your superannuation fund’s life and total and permanent disability insurance policies to ensure you’re not over or under-insured.

Some Boomers may also be over-insured and spending money unnecessarily, because many no longer have dependent children or a mortgage, and their nest eggs are large enough to cover them financially, the Herald Sun reported.

Canstar reminded investors of the importance of weighing up the savings of opting out of default life insurance against the peace of mind offered by the insurance, particularly at different life stages. 

“It is important to remember there are many factors to consider when choosing a super fund in addition to the insurances on offer, such as past performance, ongoing fees and the advice on offer, Callaghan said.

“If you’re unsure of whether you are paying for a default life insurance policy through your super fund, check your super statement or ask your fund directly to understand what you may be covered for.

The financial comparison site has also just announced seven 5-Star Rated recipients of its 2018 Superannuation Star Ratings. The seven funds included AustralianSuper, CareSuper Personal Plan, Energy Super, HOSTPLUS Personal Super, StatewideSuper Personal Plan, Sunsuper for Life and VicSuper FutureSaver.

Canstar’s research found that these funds “demonstrated robust net investment returns across the previous five years, as well as competitive product offerings, specifically when it comes to financial advice, tools and education, member access, contribution methods and beneficiary options.”

Have you reviewed the insurance within your super fund recently?