Insurance in super is vital but having duplicate policies can cost you

Insurance costs can hit your balance hard.

Insurance costs can hit your balance hard. Photo: Getty

Insurance in superannuation accounts offers valuable protections against death and injury, but it is a good idea to review your coverage to make sure you are not paying for multiple policies or protections you don’t need.

Consumer group CHOICE has found that consumers are spending up to $1.96 billion a year on unnecessary duplication of insurance policies through membership of multiple super funds.

“The confusing and complicated nature of superannuation is leading consumers to waste on average $131 a year,” CHOICE campaigns chief Erin Turner said. The cost of one excess insurance policy would slice $16,000 from a retirement balance.

The duplication results from the fact that super funds must deliver life insurance to all accounts unless members choose to opt out.

As a result, people who have worked in different industries may find they are members of more than one fund and consequently have multiple insurance policies they aren’t aware they need to opt out of.

“So we’re encouraging consumers to consolidate their super funds and invest in their own retirement, not an insurer’s bottomline,” Ms Turner said.

Even for those with one fund, Rice Warner’s research shows that the costs of insurance can cripple retirement plans, with some policies cutting retirement nest eggs by up to 34 per cent, or $606,815.

The costs of insurance depends on a wide range of factors including the nature of the job you do and how much you are insured for. If you do dirty and dangerous work on a building site then the premiums will be higher than if you work in an office lifting papers and manipulating computer mice.

This is born out by the above chart, which shows much higher premiums for heavy blue collar work. But even within categories, premiums vary markedly. That is partly because different premiums offer different benefits and also because insurance companies offer group policies to each super fund depending on its member makeup and claims history.

For example, a white collar worker with an average policy will lose 5.2 per cent with option one (including death and TPD) insurance and 9.9 per cent with option two which also adds IP. While someone with a similar job with a high premium policy will lose 10.2 per cent and 21.4 per cent respectively.

As the table also shows, people choosing to add income protection insurance (IP) to the basic life and total and permanent disability (TPD), add significantly to the cost of their policies.

Insurance might gobble up your fast food super. Photo: AAP

Insurance might gobble up your fast food super earnings. Photo: AAP

A superannuation industry insider who did not wish to be named said young people particularly can lose out  through unnecessary insurance. “If you look at young people and students working part time, you find that insurance costs and fees might eat up $6000 to $7000 over four or five years, leaving them with nothing in their balance.”

“What good is life insurance to an 18 year old with no dependents,” the insider said. The super industry needed to make it easier for people to opt out of insurance and ensure that option was widely understood, the observer said.

Check your policy details

“Insurance is a vital benefit of compulsory super that provides millions of Australians with access to affordable and cost-effective coverage – and provides real and vital benefits for many thousands of Australians each year.  Any lessening of these benefits would be a reduction in the social safety-net,” said Australian Institute of Superannuation Trustees policy director, David Haynes.

“Group coverage is particularly important for many “high-risk” occupations and industries that find it expensive and hard – if not impossible – to obtain cover elsewhere,” he said.

Super fund members need to check their insurance cover to make sure it fits their needs, “particularly after key milestones such as changing jobs or having children,” Mr Haynes said.

Those unhappy with their super costs have the option of in some cases, changing their level of cover moving to another super fund offering a better insurance deal.

The superannuation and insurance industries are reviewing the situation through the recently-established Insurance in Superannuation Working Group.

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