## Hypothetical Financial Calculations

Detailed calculations for the \$108,000 loss on retirement insurance scenario.

Please note that the information contained on this website is general in nature and doesn’t take into account your personal situation. You should consider whether the information is appropriate to your needs and where appropriate, seek professional advice from a financial advisor.

According to the recent Murray Financial System Inquiry, there are nearly three superannuation accounts for every employee in Australia.

For each superannuation account there are typically fees incurred, and you may be paying premiums for Death, Income Protection and Temporary & Permanent Disability (TPD) insurances. Let’s assume a 20-year-old white collar non smoking male has insurances bundled with his superannuation. Let’s also assume he has three superannuation accounts.

The Australian Tax Office sets minimum insurance coverage standards (see here). With the minimum insurance level and the same competing fund as the example above, premiums and fees come to around \$130 per year per account, or \$260 extra per year for two extra accounts.

Assuming that the person is 20 years old, and has their superannuation on a ‘Growth’ portfolio expected return of 8%, which represents a ‘typical’ expected return for a growth investment product, based on industry data (see here), fees plus premiums at age 20 amounts to lost retirement savings of over \$8,300 by the age of 65, due to compound interest. (For compounding interest calculations to get this figure we use the ASIC MoneySmart calculator with an initial deposit of \$260 and a regular deposit of \$260 per annum with a compounding frequency of 45 years at an interest rate of 8%).

If the person does not consolidate their account until retirement, assuming premium levels paid for the full 45 years of working and no change in super, this person would have lost over \$108,000 in savings through fees and insurance premiums incurred through additional two accounts over their working life.

* Both of these calculations are not based on your personal circumstances and are hypothetical in nature. They are based on the assumption of a fixed administration fee of \$1.50 per week (\$78 per annum) for each superannuation account, a retirement age of 65, and insurance premiums set out in the cases. The fees and premiums which you are currently being charged and those may be charged in the future may differ from this.

No insurance hypothetical

If paying too much insurance scares you, have you thought about what happens if you have no insurance? Our Managing Director Andrew MacLeod has a personal story that highlights the issue.

“When faced with a family tragedy we don’t think about cost. Cost only enters into thinking after the event. My younger brother died overseas unexpectedly last year, it cost me thousands to fly the family over, deal with the autopsy, medical, legal and diplomatic issues that come about when someone dies overseas. I assumed these costs would be lost and non recoverable. While my brother’s death remains tragic, at least the life insurance payout from his superannuation meant that a financial burden was lifted. Thankfully we had the insurance.

NATSEM at the University of Canberra says Australia is radically under-insured. According to their report:

Based on 2008 statistics, 18 Australian families lose a working age parent every day. Every year, 235,790 working age parents suffer a serious illness or injury and over 17,000 of them are forced to stop working, either permanently or for an extended period of time. Over one million working-age parents with dependents will be impacted by death, serious accident or illness.

These figures mean that more than one in five families will be impacted by an insurable event in their working lives. Most of these people will have some level of insurance, usually death cover, within their superannuation. Often the level of cover is inadequate. Income protection is also only offered as an option by the minority of funds and again, these levels are not sufficient for most families to maintain their lifestyle. While a concerted effort by the superannuation industry means this situation is improving, the fact is most Australian working families will not have adequate levels of cover to protect themselves from financial hardship and secure their way of life.