Default Cover Under Super May Be Inadequate
Adequacy of cover is a perennial topic for insurance industry discussion, with many sources questioning consumers’ understanding of their insurance needs and, in turn, their recognition of the value of investigating coverage options. The question has only become more relevant as more people obtain coverage through their superannuation funds, which provide a default level of life and disability cover that drops as people age. That default level may no longer be enough.
At one time, people’s debts decreased and their financial situations became simpler as they aged, but that is no longer a reliable phenomenon. Instead, people today carry larger debts at later ages. Since default cover under superannuation tends to decrease as people age, fund members’ default cover may no longer provide the level of security that people expect.
According to the Brisbane Times, cover at age 50 can amount to $50,000, a sharp decrease from the range of cover for those 10 or 15 years younger, when cover of $150,000 to $250,000 is typically available as the super fund’s default. Funds often begin to reduce cover as members reach age 35 or 40, with levels derived from a formula that analyses the financial situations of average fund members.
In most cases, costs of default cover are paid indirectly by members, but members can choose to purchase additional insurance directly. However, members may not always be aware that default levels have dropped.
Industry funds and retail funds treat default cover differently. The Times noted that industry funds allocate life and disability cover in units, with each unit amounting to a specific level of cover. Acceptance is automatic and costs are lower than the costs of equivalent cover obtained outside the fund, since the fund is buying on a large scale. Retail funds sometimes use that same approach, but they can also provide cover that is specific to a member’s individual circumstances.
In both cases, members can purchase additional insurance that will assure sufficient cover, provided that they remain alert to changes in their default cover and provided they are prepared to pay for it themselves.
The financial needs of people over 40 have changed in recent years, but the default cover provided by super funds has not kept pace. As the Times notes, fund members with life cover of some $100,000 cannot expect that level to adequately provide for their families if the need should ever arise.