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Insurance traps in your super

Insurance arrangements in super can create a few surprise outcomes for members who leave big superannuation funds to start their own self-managed super fund yet leave a portion in their old fund.

Members need to be wary of the traps that can cause a loss of cover. As insurance is a complex financial product; members need to understand the benefits, risks and the costs entailed when entering into insurance cover in large superannuation funds.

Even though it may seem advantageous to access low cost insurance with a large super fund there are some circumstances that may cease insurance cover including:

Most large super funds will require members maintain a minimum balance in their account to retain cover which can range from as low as $1,000 and up to $10,000.

Although most funds allow insurance cover to be kept providing premiums can be automatically deducted, some funds may cease cover once the account balance falls below the threshold and when no employer contributions have been made for six months.

Some superannuation funds that offer automatic income protection insurance will terminate a member’s insurance cover if employer contributions cease for six months. Other funds may cease income protection insurance cover after 13 months from the date of the last employer contribution regardless of the account balance.

If you change employers or no longer work in a particular industry you may risk losing your insurance cover. Funds may require that a particular employer makes contributions to the account to retain total and permanent disability (TPD) and income protection cover.

Members who cease to work in the public sector may risk losing their cover from the day they officially cease employment with the relevant public sector. These public sector funds generally do not accept further contributions or rollovers if the member is no longer working for the relevant public sector employer.

Some super funds may pay out insurance at the TPD level upon terminal illness, which reduces any remaining life cover paid on death. This may result in a deprivation of funds to account for medical or palliative care before death. This style of cover is in stark contrast to other funds that pay out 100 per cent of life cover upon terminal illness.

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