Insurance cover as part of super is effective means of protection

The latest life insurance statistics revealing that many Australians are grossly undercovered for meeting the expenses involved with temporary and permanent invalidity, as well as death, comes as no surprise. With family budgets under pressure from competing necessities including servicing a mortgage, educating children and meeting normal living expenses, it is understandable that apparently non-essential outlays will miss out.

This is despite the fact that even a short time off work without income can have seriously adverse impacts on family finances. Even though income protection insurance designed to provide an income while temporarily unable to work is a tax-deductible outlay, the harsh reality is that this is still a drain on the family budget.

For death and permanent disability insurance, the premiums do not qualify for a tax deduction in personal names. As a result, especially in the younger age groups, it is relatively easy to ignore the high potential costs of early death or disability, especially for wage earners and parents caring for children.

Some families benefit by having members in certain superannuation schemes. Defined benefit and some other generous accumulation funds automatically cover members for death and disability. The federal government's Public Sector and Commonwealth Super Schemes (PSS/CSS) are excellent examples of providing comprehensive coverage for members at no or little cost to them.

In the event of death during employment, the PSS provides a benefit based on the amount of money the member would have received at age 60 based on their current contribution rate or 5 per cent of salary. The more generous CSS, which was phased out to new members in 1990, calculates the benefit by assuming the member worked to age 65.

Unfortunately, with the movement to accumulation funds and less generous employer contributions, the insurance coverage available depends on decisions made by the fund member. Many super funds offer death, disability and income protection group insurance to members but the costs of doing so are charged to members' accounts.

Despite the fact that group insurance coverage can be cheaper than cover obtained privately, many members forego the opportunity to obtain comprehensive coverage from their fund. While it is a personal decision whether to take out comprehensive insurance coverage, the outcome is that many Australians are poorly protected for the risks of accidents, illness, death and disability.

In deciding whether to take advantage of the insurance cover in your super fund, one consideration is very important: the preservation rules preclude gaining access to superannuation until at least age 55 (or 60 for those born after July 1, 1965). The outlays charged to your fund are thus not a drain on the family budget and reduce your super payout only at retirement.

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Daryl Dixon

Executive Chairman

Daryl Dixon is one of Australia’s foremost investment experts and a well known writer and consultant. He has provided trusted advice to thousands of personal clients over more than 25 years and is an acknowledged expert in the areas of tax, superannuation (including public sector superannuation), social security and investments.

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