The bureaucratic nightmare plaguing our super – and how to avoid it

Superannuation is the biggest financial asset most Australians will ever have – yet when it comes to what happens after we die, it’s a bureaucratic minefield.

Forget the simple idea of passing on your savings to loved ones – thanks to outdated rules, endless paperwork and hidden taxes, your super and insurance payouts could be tangled in red tape for months, or even years. Worse, a big chunk of it could disappear in tax before it ever reaches your family.

When it comes to actually claiming the insurance inside our super, it can become a bit of a mess.Credit: Simon Letch

For years, the government struggled to get Australians to take out life insurance. So they bundled it into superannuation, giving super funds the power to offer coverage at reduced rates.

This made life insurance inside super a convenient, set-and-forget safety net. Many Australians don’t realise they have it, while others assume it will be a seamless support system when their family needs it most.

But what happens when that insurance is actually needed? If you’ve ever had to claim a death benefit from super, you’ll know it’s often long, complicated and frustrating. And if you haven’t yet – trust me, you don’t want your loved ones to go through it.

In December, ASIC put 10 super funds on notice, warning that their handling of insurance claims and death benefits for members could be inadequate and demanding further information. They have already taken action against CBUS and have now launched an investigation into AustralianSuper, the country’s largest super fund, for delays in paying out death benefits and insurance claims.

AustralianSuper has admitted that more than 7000 beneficiaries have been affected, with some waiting up to four years for their death payouts – a period they acknowledge is far longer than their own goal of four months.

And they’ve apologised. But this isn’t just about these two funds – insurance and death payouts from super are one of the biggest problem areas in Australia’s financial system.

The problem, as I see it, is twofold. Superannuation, and insurance inside super, operate within a tangled web of rules that many people aren’t aware of until they’re forced to deal with them. Your super balance and your life insurance payout aren’t necessarily treated the same way, and the process can become a bureaucratic nightmare.

If you haven’t set things up properly, your loved ones could be left waiting while insurers, trustees and legal teams sort out who gets what. And, alongside this, super funds and insurers are struggling with massive claim volumes as their members age (something they should have seen coming), and many – from what I hear – have significantly under-resourced claims teams as they battle to compete on low administration fees.

Too many Australians are caught in delays, simply because they ignore their super and insurances and don’t keep their paperwork up to date.

But let’s dig a little deeper so you understand it better and can make sure you minimise your risk of becoming a statistic.

The number one cause of delays in superannuation death-benefit payouts is when a member hasn’t made a binding death benefit nomination (BDBN) – a form that many members don’t even know exists – or their nomination has expired.

Without a valid nomination, the trustees of the super fund decide who gets the money from both the fund itself and the insurance payout, which can take months or even years.

If multiple family members claim the benefit, the process slows even further – and if a dispute arises, it could be referred to the Australian Financial Complaints Authority, leading to even longer delays.

Another major issue is that super balances and insurance payouts inside super are processed separately. Many assume their life insurance payout will arrive with their super, but this isn’t the case.

The super fund pays out the account balance, while the insurance company must separately assess the claim. If the insurer delays or disputes the claim – such as by questioning medical history or employment status – the entire process can grind to a halt.

Speaking of insurance, many Australians don’t realise their superannuation’s life, income protection and total and permanent disablement (TPD) insurance comes with strict exclusions.

If the deceased was not working at the time of death, or had a pre-existing medical condition, the insurer may reduce or deny the payout altogether. Insurers also require extensive documentation, which can significantly slow down the process – especially since all communication must go through the super fund rather than directly with the beneficiaries.

Life insurance inside super is considered a convenient, set-and-forget safety net.Credit: iStock

When a claim is disputed, it can drag out for months while legal teams and medical assessors review the details and super fund administrators manage the back and forth, leaving families in financial limbo when they need the money most.

Then there’s another whole area of financial shock families can face – finding themselves having to pay unexpected taxes on superannuation and insurance payouts. Most people don’t realise that if a superannuation death benefit goes to a spouse or dependent child (under 18), it is tax-free.

But if it’s paid to an adult child or non-dependent, it could be taxed at up to 15 per cent on your super balance and up to 32 per cent on your insurance payouts, significantly reducing the final amount. Many Australians unknowingly structure their estate plans in a way that results in a higher tax bill, leaving their beneficiaries with far less than they expected.

The involvement of the estate and probate system can make a right old mess of things too – and cause serious delays. If the super payout is directed to the estate (via a legal personal representative), it can get caught up in probate or legal disputes. If there are creditors owed money, the payout may not even reach the intended beneficiaries.

But the good news is, you can take steps now to minimise the risk of this happening. Here are three:

1. Make a binding death nomination

A binding nomination ensures your super (including any life insurance inside it) goes directly to the person you choose. Most people assume their super will automatically go to their spouse or kids via their will, but that’s simply not the case.

If you haven’t completed a binding death benefit nomination form, or updated your binding death nomination in the last three years (they expire), your fund’s trustees decide who gets your super – and that process can take months, or in the case of some of these recent issues, years.

And, if there’s a family dispute, it could be tied up even longer while your super fund, your life insurer and the disputing family members settle their claims.

2. Know who can actually receive your super tax-free

Superannuation law doesn’t limit who can receive your super, but it does determine who gets it tax-free. Your spouse, children under 18, and financial dependents can receive it without tax.

But your adult children? Not necessarily – unless they were financially dependent on you before your death, they could be hit with a tax of up to 32 per cent.

If you want your adult kids to receive your super tax-free, the best option is usually to leave it to your spouse first, so they can withdraw and pass it on tax-free. Or, you might want to consider withdrawing and gifting your super before you die (if you’re over 60 and retired).

3. Check your life, TPD and income protection insurance policy terms

Many Australians don’t realise their insurances inside super have conditions attached. If you’re not working at the time of your death, or if you have a pre-existing medical condition that wasn’t disclosed, your family could be in for a nasty surprise when they try to claim.

Read the fine print and make sure you understand what’s covered – and what’s not. If this concerns you, you might want to consider life insurance outside super.

Too many Australians are caught in lengthy delays, simply because they ignore their superannuation and insurances and don’t keep their paperwork up to date. Don’t be a statistic – take action on yours this week.

Bec Wilson is author of the bestseller How to Have an Epic Retirement. She writes a weekly newsletter at epicretirement.net and is host of the Prime Time podcast.

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making financial decisions.

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