Over insured - just too much to bear

By Paul Clitheroe

YOU really can have too much of a good thing. A recent report from the Insurance in Superannuation Industry Working Group found many people hold multiple life insurance policies through their super and the premiums are eating away at nest eggs.

Life insurance is an automatic feature of many super funds and that's generally a good thing. It means many Australians have life cover in place who otherwise would not.

Fund trustees can't second guess your personal circumstances so it's always important to check how much cover you have in place. According to Canstar's latest star rating report on life insurance, cover in super is usually only worth $100,000 or $200,000, and you could need considerably more.

Your super fund can tell you the value of your life insurance. And if you're under-insured, it's easy to top it up by contacting the manager. The premiums come out of contributions or your fund balance, so if you'd rather hang onto the money for retirement, think about arranging separate life insurance outside of super.

The downside of automatic cover is that if you have more than one super fund you could be over- insured, and the additional premiums will steadily erode your account balance.

In fact, four out of 10 Australians have multiple super funds. So the problem of over-insurance is widespread.

The issue is more serious if you have income protection cover across a number of super accounts.

Most income protection policies only let you insure up to 75% of your wage or salary if you become sick and can't work. You can't normally claim on more than one policy because you'd end up receiving more than 100% of your normal income.

It makes having more than one policy a waste of money, and the premiums could be better used to grow retirement savings.

I should explain, it's possible to have more than one income protection policy in place but it only works if the waiting and benefit periods are complementary.

For example, the cover held through your super could have a 90-day wait period with benefits paid for two years.

Alongside this, a separate policy could have a two-year wait period, and pay benefits until you turn age 65.

But it's doubtful this sort of match would be the result of coincidence.

It all reinforces the value of having just one super fund, and checking you have the right cover in place for your needs. Paying premiums on insurance policies that you don't need or can't claim on will make the insurer rich, and leave you financially worse off in retirement.

Paul Clitheroe is a founding director of financial planning firm ipac, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.