Closing your insurance gap
02 February 2018 | Investment principles
A fundamental personal finance trap is to assume that your super fund's default insurance cover is adequate for your circumstances. Chances are it isn't.
The latest Underinsurance Australia report, recently released by independent consultants and actuaries Rice Warner, makes the point that most super funds aim to provide for part of their members' insurance needs through their default cover.
"The median default cover of superannuation funds meets roughly 50 per cent of basic-level life cover needs for average households," the report comments, "but a much lower proportion for families with families."
As the report emphasises, striking a balance between adequacy and affordability is always a challenge for super funds given that member demographics and family circumstances can significantly vary.
The levels of default life cover for some younger members was likely to be higher than their needs given that many were not married and had no children. "In contrast, with changing family formation patterns and increasing debt levels at higher ages, default covers are often inadequate for older members."
The Underinsurance Australia report covers life, total & permanent disability (TPD) and income-protection insurance obtained inside and outside super.
Key conclusions include:
- The median level of life cover meets only 47 per cent of basic needs.
- The median level of life cover meets just 28 per cent of the amount needed to ensure that family members and dependants can maintain their standard of living after the death of a parent or partner.
- The median level of TPD cover meets only 14 per cent of needs.
- The median income-protection cover meets 21 per cent of needs.
- Only a third of the working age population (excluding dependent children) have income-protection cover.
Most Australians gain any of their life, disability and income-protection insurance through their large super funds. This means that a useful starting point for measuring your insurance needs is to understand the level of default cover provided by your fund.
Inadequate insurance cover can rapidly disrupt a family's personal finances and investment planning following the death or loss of a job of a parent or partner.
It's worth repeating that chances are that your super fund's default cover is inadequate for your needs. Much depends on family circumstances.
Ensuring that your family's insurance cover is adequate ranks highly among the principles of sound personal financial and investment planning.
Written by Robin Bowerman, Head of Market Strategy and Communications at Vanguard.
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Robin Bowerman, Principal, Market Strategy & Communications at Vanguard Australia, shares investment and personal finance insights gained from over two decades in the finance industry as writer, commentator and editor.