People have become a lot more aware of their superannuation options in recent years, and more people are being proactive and switching their super to different funds. Many are lured by the promise of lower fees or by what the Barefoot Investor suggests.

I’m not against super switching, but it’s not a panacea for a lack of retirement savings. Reducing fees is only one part of a more complicated plan.

But there’s one mistake I see people making time and time again, and if you get this wrong, it may hurt you financially.

Learn from one lady’s misfortune

A friend of mine is a financial planner who specialises in helping people with disabilities, particularly around the area of claiming on any insurance they may have as well as any government benefits they are entitled to.

Last year he shared this story on LinkedIn – I’ll paraphrase it here, but you’ll get the picture.

A few days earlier he’d received a phone call from a lady, we’ll call her Eve.

Eve was in her 50’s and was calling on behalf of her daughter, Susan, who was in her mid-30’s. Susan had been diagnosed with breast cancer and Eve was calling to ask my friend if he could help investigate what insurance cover Susan had in place in her super fund.

After some phone calls, my friend discovered the following.

A few months earlier, Susan had consolidated her super funds into one new fund. I believe she’d had three different super funds and she closed all three and moved the money to her new fund – one with lower fees.

Unfortunately, she forgot to check what insurance benefits she had in her existing super funds. The funds were closed, money transferred, and her insurance was cancelled.

A few months later, she was diagnosed with breast cancer and had no insurance.

Devastating.

My friend had to call Eve and let her know the news. Her daughter had no insurance cover in her superannuation at a time when she needed it the most.

What could have been…

In an alternate universe, Susan would have paid more attention to any insurance she had in her super funds.

Most super funds set up by an employer will have a default level of cover within them – life, total and permanent disability (TPD) and income protection. The amounts will vary, but there’s usually some default cover.

The Australian government has recently introduced some rules to reduce the risk of people doubling up on insurance or having insurance that they don’t need so it pays to make some enquiries to see what you do or don’t have.

When you consolidate super fund, most funds will give you the option to transfer any existing insurance cover across to the new fund. There’s usually a form to complete and you need to provide evidence of the cover you want transferred and certain limits will apply, but the ability is usually to transfer cover is offered by most of the major funds.

Susan, like many people, probably didn’t think too much about her cover. Unfortunately, many of us suffer from optimism bias where we like to think that only good things will happen to us in the future. So when it comes to insurance, it’s easy to be optimistic and think that we won’t need it.

I’m in my early 50’s and can tell you that I’ve had a number of friends die young from diseases and illnesses that they didn’t plan on getting. Unfortunately, bad stuff happens and we can’t pick and choose if it happens to us.

This is why insurance exists – to act as a financial safety net in case something bad happens.

In an alternate universe, Susan would have had an income protection policy that would have paid her up to 75% of her pre-disability income. She may also have had some trauma insurance (only available outside of super), to pay a lump sum on diagnoses of major illnesses, such as cancer.

Whilst these insurances can’t bring physical healing, they can provide a financial safety net that enables you and your family to focus on the battle you’re fighting.

Don’t make this mistake

If you’re tempted to switch your superannuation to another fund, think about what benefits you may lose in the process. Like insurance.

And rather than just do a straight transfer of cover, have a thought about what levels of cover you may need. You’ll probably find that your current levels of insurance are inadequate and need to be increased.

Please learn from this story.

Sometimes when it comes to your finances you can make a mistake and be blissfully unaware of the potential problem. If Susan had never been diagnosed with cancer, she would have remained happy with her decision to switch funds. Unless something happened that showed her the error, she would never have known.

Please think before you switch.