Life insurance can kill teens' contributions

Your son or daughter has started their first job and the last thing on their mind is superannuation. But if they are not careful, they can easily end up paying for life insurance they may not need. That is because most super funds provide a minimum level of life insurance unless the new employee ticks the box on the application form to opt out.

Money received an email recently from the father of a 16-year-old working part-time who found more than half the son's modest superannuation payments were going to pay for the costs of life insurance, which covers death and total and permanent disability.

The father pointed out that no doubt there was fine print about insurance in the documentation when his son joined the fund, but to have more than half of the contributions in insurance premiums is "outrageous". He writes that superannuation is an important part of everyone's financial planning but funds are going to devalue their product if they treat members this way.

Employers do not have to pay the superannuation guarantee to those employees earning less than $450, before tax, a calendar month, or to those aged 70 or over. Most 16-year-olds with part-time or casual work are not receiving superannuation. That is because employers only have to pay super to employees under 18 who work more than 30 hours a week and are paid more than $450, before tax, a month.

However, some workplaces are covered by an award or agreement where all employees receive the guarantee and some employers choose to pay the superannuation to all employees anyway. Life insurance cover through large funds is usually very cheap because they buy a lot of insurance cover. A large fund would charge about $1 to $1.50 a week for $50,000 to $100,000 for death and disability cover to someone under 25. For those who need it, it is usually better to buy life insurance through a different super fund.

Buying the insurance as an individual is usually more expensive and a medical examination may be required. With large super funds there is usually automatic acceptance. But teenagers are not likely to have need of life insurance unless they have dependents or financial responsibilities.

For them, all the super guarantee should be going to building their account balance. It is understandable how, with a new job in a busy cafe, for example, the details of the superannuation fund and the disclosures covering the life insurance are overlooked. In most cases the member can opt out of the insurance at any time by contacting the fund.

Anyone who has had a series of shorter-term jobs could be paying for several lots of insurance. Consolidating super accounts into one also reduces administration fees, because each super fund will have a fixed administration or member fee.

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