Beware the hidden predator as you approach retirement

Even while working at a senior level in a super fund in later career, the impact of death and disability insurance cover premiums on my retirement savings capacity slipped under the radar.

Recent changes to super rules recognised the erosion of small account balances by insurance premiums and made cover optional for super fund members under 25. However, premiums for older people can be equally corrosive, particularly in the context of the relatively low concessional cap of $27,500 applied to employer and salary sacrifice contributions.

As with most of these things, the value of life and disability insurance will differ for each individual. Their state of health, occupational risk exposure and lifestyle choices may make paying premiums worthwhile. Nonetheless, it’s worth undertaking some cost-benefit analysis relative to retirement savings goals, particularly as you pass superannuation preservation age, when you can start drawing down on your super.

Insurance premiums payable through super funds vary, with the principal reasons for this being a consequence of the type and amount of cover automatically provided by the fund to new members and the size, demographic and risk profile of fund membership (largely a product of the industry sector/s they are employed in).

It is important at this point to emphasise that insurance cover provided through super is, on balance, a good thing and has saved many members and families from financial disaster in the event of accident, illness or death. Without the mechanism that automatically provides a basic level of cover, it is likely that most Australians would have no protection at all against these devastating events.

However, insurance premiums rise as members age in line with the calculated increased risk of illness and death.

For someone with the holy trinity of death, permanent disability and income protection cover, the premiums can significantly reduce their tax-concessioned savings power in the last decade of work.

Even as the increased concessional contributions cap rose to $27,500 from 1 July 2021, the premiums charged for this type of cover, added to the 15% contributions cap paid on concessional contributions paid into a member’s account can add up to more than 25% of the cap.

In 2017, this belated realisation led me to first cancel my income protection (temporary disability) cover. In that year, my total insurance premiums were $6,751. The point was that the amount of future income I was protecting didn’t justify the premium paid, particularly as I had reached preservation age and could access my super if needed.

Add this amount to the $4,125 contributions tax I would have paid on the present-day cap of $27,500, the chunk carved out of my retirement savings boost would have been $10,786, leaving a net of $16,714 added to my account, excluding super administration and investment fees charged by the fund!

Of course, you could choose to offset this by making voluntary non-concessional contributions to your super account, but it still does not diminish the fact that you should consider whether the insurance you have is appropriate to your needs.

Over recent times, the 2019 Protecting your super legislation^ has removed many younger fund members from the insurance pool and most funds have announced increases in premiums for group life and disability insurance, strengthening the case for reviewing your insurance cover as an older member.

These increases are not due to funds increasing their profits, as not-for-profit funds provide cover for members at a rate calculated to cover the total group premium the fund pays to its insurer and. perhaps, some other peripheral insurance administration costs.

My experience suggests that reaching your superannuation preservation age*, should be a trigger for reviewing your insurance needs and balancing those against the potential for a final big savings effort to boost your retirement income.

It will come down to your personal circumstances and you might need to seek professional financial advice to ensure you make the right call. In the end, it comes down to the mathematics of risk and benefit for your situation and financial goals.

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* Your superannuation preservation age is based on your date of birth. For people born after 1 July 1964, it is age 60. For those born earlier it varies. You can find a table on most fund websites or here on the ATO website.

^ You can find more information about this on most fund websites, or here on the ATO website.