Written

For

The

Australian

-

Hidden

sting

of

life

insurance

costs

in

industry

funds

$1.811 trillion. That's how much Rice Warner estimates Australians are underinsured on life insurance. It's a staggering number, and it's the reason industry super funds automatically bundle basic life cover into members' accounts when they join. On the surface, this is a great feature. Dig a little deeper though, and there's a sting in the tail that catches most people off guard.

Here's the issue. Industry super funds only offer life insurance on a "stepped" premium basis, meaning your premium starts low when you're young and climbs every year as you age. Retail super funds offer stepped as well, but they also give you the option of "level" premiums, where you lock in the cost at the age you apply and it stays flat for the life of the policy.

The numbers tell the story. I looked at a 25-year-old electrician wanting $1 million of life and disability cover. Through one of Australia's largest industry super funds, the premium starts at $1,596 a year. The equivalent level premium policy through a major retail fund costs $2,078 — nearly $500 more expensive up front. So far, the industry fund looks like the winner.

Fast forward. By age 40, the industry fund premium has crept past the level policy. By age 50, the industry fund cover is over $5,000 a year, while the retail level policy is still sitting at $2,078. That's when you need the insurance most, and that's exactly when many people cancel or reduce their cover because it becomes unaffordable.

Accountant Nathan Vant, who I spoke with, locked in level premiums in his early 30s for exactly this reason. Smart move.

Industry super funds have plenty going for them — strong returns, low fees. But the insurance component deserves closer scrutiny than most members give it.