Life Insurance and Retirement
Do you need Life Insurance?
If you are retired, or nearly there, your children are self-sufficient and your home is paid off there may be no need to continue life insurance. However, life is rarely that simple and it is now common for parents in their 50s and 60s to have dependents at home, with mortgages outstanding as we live and work longer. However, life insurance products increase in cost very significantly with age, and need to be carefully managed. This is particularly the case for products within superannuation which, although they may be cost-effective, nonetheless only appear as debits from your superannuation account and therefore are effectively "hidden" to some degree.
Most superannuation funds take the approach of providing "less cover for the same cost" as members age, and that's a reasonable approach in many situations, but there may come a point where the amount of cover becomes almost meaningless, except as a proxy for funeral insurance.
Life insurance policies, including income protection, trauma and TPD, generally expire when you reach a certain age. After this point you will no longer be able to make a claim, even if you are still working. For some products this age is fixed, while others will allow you to hold the policy for longer, for an additional premium.
You need to look at your own individual arrangements very carefully, but as an indication:
Usual Expiry Age
|Term Life Insurance||
70 - 99
65 - 70
|Trauma (Critical Illness) Insurance||
65 - 70
65 - 70
Cover through your Super Fund
As we mention above, the most cost-effective way of accessing life insurance, regardless of your age, may be through your superannuation fund. But note that superannuation funds do not have to provide default or minimum levels of life insurance, unless it is an employer-sponsored fund.
Be aware that if you run a self managed superannuation fund (SMSF) you are required to consider whether to hold insurance for each member of the fund as a regulatory requirement - this doesn't mean that you necessarily need to take out cover, just formally consider the need.
Note that trauma insurance is not available through superannuation funds, as a consequence of legislation that came into effect on July 1, 2014.
Although the benefits of arranging life insurance through super fund can be significant, including automatic acceptance without the need for a medical or revealing pre-existing conditions, there are some drawbacks you need to bear in mind:
- Limited cover and less product flexibility
- Slower payment - because the Insurer pays the fund and then it pays the beneficiary, the process can be slower
- Care needs to be taken that a binding beneficiary nomination has been made, and maintained, or the trustees of the fund may choose the beneficiaries. Additionally, some funds do not provide for binding beneficiary nominations.
- As we mentioned previously, insurance premiums are deducted directly from your super balance, and while this may be tax efficient it nonetheless reduces your superannuation fund balance.
Warning - Life Insurance Offers and "Default Coverage"
Super fund members will sometimes find themselves the subject of life insurance offers from their fund which offer "very competitive" premiums without the need for "underwriting". This can be very attractive for members in their 50's seeking to avoid the hassles associated with medical tests but the catch is that cover will sometimes apply by "default" unless you opt out. Our view is that these "default" arrangements should be illegal and you need to very carefully consider the precise terms of the offer.
On at least one occasion we are aware of the fund not making explicit in the initial documentation that - unless you advised otherwise - your individual premiums would be based on your being a "smoker and a blue collar worker". Those ratings generated the maximum premium for the insurer and maximum commission for the fund and would likely not have been competitive if the individual had gone to the general market for cover.
In the periods leading up to retirement, in your 50s and 60s, you clearly need to continue reviewing your level of life insurance against your current and foreseeable needs on a regular basis. Given the rapidly increasing level of insurance cost through this period, you cannot afford to simply accept it as an ongoing cost. If your circumstances are "out of the ordinary" then the insurance provided within your superannuation fund may not be sufficient, and you should discuss the alternatives with your financial planner or advisor.