Consider life insurance within a super fund

Data released by Credit Suisse confirms retailers are not the only sector adversely affected by customers tightening their purse strings. Over the past four years, the lapse rate for life insurance policies has increased by almost a third, with nearly 16 per cent of policies lapsing in 2012. This trend is putting pressure on the life insurance industry, which could otherwise be expected to benefit from improving mortality rates.

Policy lapses have a disproportionate impact on profitability because renewals do not involve the heavy upfront costs involved with selling and establishing new policies.

For policyholders facing financial pressures, the situation is different. The obvious but not always most sensible way to balance the books is to cut discretionary outlays. Life insurance falls into this category.

Australians generally are under-insured because it is only too easy to neglect or postpone paying attention to the financial consequences of a premature death of a key income earner or a parent with dependent children. For people without substantial assets already, life insurance is the only way to protect against or reduce the severe financial impact of an early death.

A major problem is that even though the cost of life insurance is low for younger people in good health, premiums can still be expensive because of the high level of coverage required to cover the loss of a breadwinner or parent of young children.

Another reason why people may be allowing their personal life insurance coverage to lapse is the competition from obtaining coverage within a superannuation fund. Many super funds offer members comprehensive life, disability and even income protection within their fund.

The premium rates can be highly competitive because of group coverage arrangements. Instead of being required to pay premiums out of personal income, in a super fund the costs of insurance coverage can be met from compulsory employer contributions or super fund earnings. This improves the family’s cash-flow situation and offers scope to reduce the overall costs involved by accessing group coverage and more tax-effective arrangements.

The message for people considering taking out coverage or concerned about the cost of an existing policy is to compare the costs of obtaining coverage within a super fund. One warning, however. Be careful of allowing an existing policy to lapse before comparable replacement coverage is obtained just in case the new provider is not prepared to offer coverage.

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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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