Large funds have life insurance covered
Most of us don't have enough life insurance, so it's good that large superannuation funds provide "default" death and total and permanent disablement insurance to their members, who otherwise may not have any at all. It is default cover because the fund member receives it whether they ask for it or not. Consequently, almost everyone has life-insurance cover through their fund.
But life insurance obtained through superannuation funds is getting pricier, with some large funds increasing the costs by up to 50 per cent. The price rises are across all types of super funds - non-profit, retail and corporate. The funds say it's because they and their insurers are experiencing more disability claims as the economy remains weak and unemployment edges higher.
Insurers are also subject to higher capital-adequacy requirements. The current round of price rises comes after several years of price falls. Super funds are concerned by the underinsurance of their members and have been increasing the level of default cover. That means $1 of premium buys more cover than five years ago.
The amount of cover mainly depends on the member's age. Most large funds provide the greatest amount of default cover to fund members when their financial responsibilities are greatest - usually between the ages of 35 and 45. This is the default arrangement, but most funds allow their members to decrease the cover if they wish.
Even allowing for the big price rises, life insurance is much cheaper through a large fund than buying the same cover outside super. And large super funds usually accept a fund member's application for insurance with no questions asked about their medical history, up to the default cover amount.
Applications for cover above the default amount would usually require at least a record of medical history, and cover could be denied. Even if a member encounters health problems later on, they will still be covered up to the default cover limit and pay the same premium as other members of the same age.
Life insurance is so attractive through large superannuation funds that there is talk of self-managed superannuation fund trustees keeping a small amount of money with the large fund they were with before starting their own fund just to retain cheap life insurance with automatic acceptance.
It should be pointed out that "disablement" is tightly defined under superannuation law. It is "total and permanent" disablement. To make a successful claim, the fund member usually has to show that because of injury or illness, he or she will never be able to work in "any" occupation.
There are policies available outside superannuation where the definition is wider. Some of these policies will pay a claim if the person is unlikely to work again in their "own" occupation. Though easier to make a claim, these policies are more costly.