Most Australians breathed a sigh of relief in the 2018 Budget that few changes were made to super. The government did however place some focus on limiting the amount of superannuation being eroded by fees.
The first proposal capped fees at a maximum of 3% for super balances below $6,000 which is welcomed by all, but then they indicated that inactive funds with balances below $6,000 would be rolled-out to the ATO, to ‘save on fees’
But what about the default insurance?
The budget also proposed that young Australians below the age of 25 will have to opt-in to insurance within their super fund, removing the benefit of receiving a default level of cover automatically.
This seems short-sighted when considering the long-term benefits of financial protection and relative costs of having this benefit setup automatically and early.
In 2014, the government introduced MySuper which streamlined the setup of super funds for new employees to receive employer compulsory super guarantee payments. It also continued to make default automatic accepted insurance cover inside of the fund compulsory, with the option to provide members a way to opt-out of the cover.
The reason being that underinsurance in Australia is a major issue and, in most cases, the ONLY insurances Australians will own is through the default amount they get when starting their super funds.
The default insurance in these super funds is offered automatically to new joiners without any need for a medical health assessment.
The level of cover is age-based which means when you're young and first starting in the fund, the level of cover is low and the premium is low as well. As you get older the level of cover automatically increases as does the premium.
Where the budget could go wrong
By forcing an opt-in to insurances within super, instead of an opt-out, young Australians could miss out on the cheapest, non-medically assessed insurance they will ever get the opportunity to undertake.
Worse still they may never take out personal insurance, as many 25-year old Australians tend to prioritise car insurance over cover such as income or disability protection.
The risk is further magnified if they start a super fund with no default insurance and their forgotten or lost super, which had insurance cover, is transferred to the ATO (due to the proposed ‘under $6k rule'), foregoing all life, disability, and income protection cover.
This could leave some young families with no insurance cover at all, potentially creating a financial burden on immediate family, such as pre-retirement parents which could impact their retirement plans. The bank of mum and dad may become a lender of last resort.
In an era of rising health-related issues and claims plus record levels of underinsurance across Australia, it seems very short-sighted to turn this issue into a pure, ‘costs in super’, argument.
The fact is, having this cover in place could be worth a lot more than just the few dollars you’d save each week in premiums.
A 24-year old young Australian female working in a white a collar role could be offered around $116k Life and $48k Disability (any occupation) when starting a new default super fund as part of commencing a new job. Premiums vary but some default providers could offer this level of for as little as $82 per year, $1.50 per week, without any medical assessment now or on claim. That’s less than a cup of coffee a month!
Now if she was wanting to purchase the same level of cover outside of super the cost could be around $210 per year, $4.04 per week.
Plus, she would also need to go through a full medical assessment.
COST and BENEFITS IS NOT SHORT TERM
Young Australians and their parents need to understand that the cost and benefits of insurance protection is not a short-term investment. Years of premiums can be invested into a risk management program which may appear to have no benefit until the day of claim.
At that point you’ll be sure that the premium spent will be the last thing on your mind, and the benefit being paid out which will assist you with your sudden disability, loss of income, or worse loss of a loved one, will be gratefully received.
Should this budget proposal become law, it’s important that you, or your children, are aware of the benefits of that default insurance offers and the impact of not opting in to protect yourself now and into the future.
For more information
For more information about establishing your superannuation and risk management plans, it can help to obtain guidelines from specialists. Please contact an RSM Financial Specialist, who will guide you through the steps.