Strength In Numbers

Sydney Morning Herald

Wednesday May 21, 2008

Anne Lampe

All industry and retail super funds have life and temporary and permanent disability insurance options. Fund members can choose to buy a lot of cover or a little, at varying premiums and often without being required to undergo a medical up to a certain level of cover.

There are several advantages of buying insurance within a super fund. For a start, the premiums are paid with pre-tax dollars, whereas outside a fund they are paid with after-tax dollars, which makes them significantly more expensive - especially for those on the top marginal tax rate.

Insurance provided within a fund is bought at group rates and is almost always cheaper compared to buying the cover as an individual.

And having a fund trustee standing behind the member ready to argue his or her case if a disability claim is rejected is also a great advantage.

If a large insurer rejects a claim, the policyholder has to battle the insurer's might and legal resources. In a super fund, the member can approach the trustee for help to argue his or her case.

Insurers who want to hang on to the group's business are less likely to be cavalier about rejecting a claim than if they are dealing with an individual.

Since the rules for early pay-out death benefits for terminally ill fund members changed seven months ago, access in these circumstances are now possible through a super fund.

Life insurance pay-outs to dependants are also tax-free out of a super fund (but taxed at 15 per cent if paid to the estate or to non-dependants).

But there is a potential downside that comes with super choice.

Fund members are now easily able to change funds in the hope of generating higher returns but they seldom consider the implications of the switch on their insurance and, in particular, whether they will forfeit superior life and disability protection.

The new fund may have higher returns but its insurance package may also be inferior - premiums may be more expensive; it may have lower level cover for the same premiums; it might have less friendly definitions for disablement; and, most importantly, it may require middle-aged and older employees undergo a medical that may reveal a condition requiring higher premiums.

But there are no hard-and-fast rules. Virakone Sengchanh, a technical research analyst with Centric Wealth Advisers, says getting death benefits paid from an individually bought policy is often faster than getting it paid through a super fund.

This is because super fund trustees must go through a process to determine who is entitled to the death benefit if it is not a clear-cut case of a dependant being nominated as the beneficiary.

Holding a life insurance policy outside of super is a good estate planning tool.

It is more suitable for complicated family relationships and is simpler to administer.

In any event, Sengchanh says, you should get sound financial advice before buying a life insurance, disability or trauma insurance policy outside of super.

There are many different types of policies and premiums, which can make the job of comparing, understanding and choosing a policy a complex exercise.

Many clauses are in legalese and can be difficult to weigh up. Further, having a financial adviser is helpful when making a claim.

But most important is Sengchanh's advice to fund members contemplating a move: do your research before moving out of the existing super fund, especially if a medical is required.

He advises members to check the features of the new fund to establish whether the level of cover is as good as the existing fund and is no more expensive in terms of premiums, management fees or administration fees.

© 2008 Sydney Morning Herald

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