DIY Insurance

Everyone needs life insurance, but if you're running a DIY fund you're on your own. Traditionally, most people got their life insurance through company super: Now DIY operators have to fend for themselves.

After shopping around, you have probably been appalled by the huge increases in cost of your life insurance premiums '” life insurance cover outside company schemes can be 50% higher than traditional policies.

Economies of scale mean your former retail and industry funds could demand cheaper rates; self-managed funds with just a few members find themselves in a seller’s market.

Traditionally, DIY operators mostly sought individual cover. Most companies offer general cover, death cover, total and permanent disability (TPD) cover, income protection and critical illness or trauma cover.

Failing to know specific details of the cover can have devastating consequences. If you fail to consider your mortgage, for example, you could put your loved ones in a situation where they could lose their home. If you don’t consider the age of your dependants then your cover might just desert them when they need it most.

It is most important that you keep your insurance company updated on the details of your life circumstances. Income protection, for example, is often offered at an agreed value. If you fail to inform the company that your circumstances have changed you may not be eligible for the benefit you deserve.

TPD insurance should also be considered carefully. Many types of basic TPD insurance offer “any occupation” cover. This means that if, for example, you are a pianist and suffer some misfortune that renders you incapable of playing the piano but perfectly able to pour a beer, then you may not be eligible for a payout.

Consumer finance research firm Cannex offers a particularly useful application that helps you assess just how much cover you require and estimate the size of the premiums you can expect. The Cannex Needs Analysis Calculator takes into account mortgage and car repayments, annual expenses, school fees '” even “final expenses” such as funeral costs.

Generally speaking, DIY life insurance is charged annually. The more cover you have and the more comprehensive the policy is, the more expensive the premium will be.

Some experts warn against taking out more cover than you need. You may, for example, have calculated that in the event of your death, you need to be able to pass on $500,000. If you already have $250,000 in your DIY fund, it’s possible you only need a policy worth $250,000.

To ensure your money is bequeathed as you wish, you will need to make what is called a “binding nomination”, in much the same way as making a will determines how your assets will be distributed. The binding nomination ensures the benefit goes to the person you nominate; without it the fund’s trustee can distribute the benefit at their discretion.

However, there have been some promising developments in recent months in response to the boom in the number of self-managed super funds, estimated by the Australian Bureau of Statistics at 319,000 at growing by about 2000 a month.

The good news for DIY operators working alone is that they can now access cheaper “group” cover through some insurance broking networks. Small funds are grouped under standard policies that are similar to those offered by an industry or super fund.

Brokers get access to a “pool” of group insurance and can sell policies to individuals at a reduced rate. A benefit of such a policy is that, being standardised, it involves less paperwork and won’t require, say, the comprehensive family medical history needed for a tailored policy.

One of the newest group policy products is the Family Care Protection Plan, available through Family Care Australia. Underwritten by multinational MetLife, premiums are reduced by creating a common due date for all policies. Further, there is no additional policy fee if your fund contains more than one member.

Another group that offers a group policy product is MLC. One of its core products is the Masterkey Custom platform, which DIY operators can use to manage their funds with the assistance of a financial planner. Through this platform MLC offers life, income protection and TPD insurance at group policy rates.

Asgard also offers individual policies with cheaper premiums under its Personal Protection package. Underwritten by PrefSure, these policies are available to individuals unencumbered by a platform or wrap, like the one offered by MLC.

Of course no system is perfect. Although there is a tax advantage in paying your insurance premium out of your super fund, is often not the case for trauma or critical illness cover. You can, of course, take this type of cover independently of your DIY fund.

Of the three group policy arrangements listed above, only Asgard allows an individual to pay their critical illness or trauma insurance premium out of an SMSF. Asgard’s head of insurance, Vic Terpkos, stresses that it is the responsibility of the individual to ensure the trust deed addresses any regulation issues that may arise from this.

Separately, another area of cover that is equally contentious is mental health. Recognised diseases and conditions such as Alzheimer’s and Parkinson’s disease are readily covered but the definitions surrounding depression are quite rigid, and in the case of a claim the onus is on the policy holder to ensure that they can prove just how debilitating the illness is.

There are several ways to access cheaper life insurance but it is imperative that you not only know where to find it but understand precisely what is being covered. Lindsay Howard, Cannex’s manager of risk research, says: “Most people would like to be able to get comprehensive insurance advice from a broker, but given the complexity of the regulations SMSF industries it’s crucial that small business owners and SMSF operators get advice from a specialist risk adviser.”