Today, I want to talk about the most ignored and, arguably, most vital piece of your financial security puzzle: risk insurance. The good news is you probably have it even if you don't realise it. But it's downhill from there.

A few years ago, the government decided it was a great idea to force Australians to hold insurance inside their super – so life, total and permanent disability (TPD), and possibly even income protection insurance (I'll explain more in a mo).

But on Monday, Financial Services Minister Kelly O'Dwyer is expected to concede they've made a big boo-boo – and announce significant changes. In my estimation, there are five flaws in the current system … and they've hit apathetic Aussies hardest.  

1. Hello underinsurance

In the new world of "MySuper", if you haven't actively picked a fund, you will be placed in a low-fee fund which will automatically come with a minimum amount of life and TPD cover (which pays a lump sum if you are totally and permanently disabled – I know it's confronting stuff, but it's important). "Happy days, this is at least taken care of for me", you may think – if you know it at all. But the amount for which you are insured will be minimal … very possibly insufficient to take care of your debts and dependents if you, umm, pop your clogs.

2. Bye bye contributions

When you hold insurance in your super you don't pay premiums out of your pocket, but out of your super contributions. And of course, if you have multiple funds, you probably pay multiple premiums (so there's even greater reason to find any lost super). This can significantly sap your super with an Insurance in Superannuation Working Group claiming in April that insurance costs and multiple funds and premiums are the biggest culprits in eroding superannuation balances. It's proposed an automatic, industry-administered refund of duplicate premiums. But for lower income earners even with one fund, premiums can entirely erode savings. So the expected announcement today that it will be easier to opt out of compulsory insurance is laudable. The premiums are also a far greater issue than they were a month ago because they count in the cap on how much you are allowed to pay into your super each year – and that cap was slashed by $10,000 for the 49 and overs on July 1. It's now $25,000, so $5000 of insurance (a feasible cost if you top up insurance within super) only leaves you with an allowable $20,000 for your super balance itself. (On a related note, the government will also close a ridiculous loophole that has let unscrupulous employers reduce their mandatory super payments by an employee's salary sacrificed contributions.)  

3. The clawbacks are coming thick

The third problem of automatic coverage is it's not necessarily good coverage. First, it's one-size-fits-all – if you have any special medical needs, you may not be covered (although what's called group underwriting could also help you get cover for which you wouldn't be approved with a standalone policy). What's more, funds have been diminishing their T&Cs left, right and centre to cope with higher claims and claim amounts in recent years. Michael d'Apice, managing director of AustBrokers, tells of one insurer who recently migrated all members of a fund onto a "smokers" policy, and few of them realise it.

4. Inside or outside, are you covered?

There has been simply so much scandal in recent years about the claims practices of risk insurers, notably CommInsure. A new code of conduct drawn up by the Financial Services Council (FSC), and binding on its members, went live on July 1 … but was not without controversy either. The FSC failed to submit the code to ASIC for approval, as requested by Minister O'Dwyer, and says that's under consideration for the second iteration. This is being drafted at the moment so at least – as is essential – this will be an evolving guide.

5. Donation consideration

There is a very nasty little definitional wrinkle when it comes to superannuation and income protection policies, which replace 75 per cent of your income on accident or illness. These rarely cover elective surgery and, unconscionably, becoming a live organ donor almost always falls into the "elective" category. Full credit to the federal government for committing for another four years to providing nine weeks' minimum wage to people who donate a kidney or part of a liver to a loved one (paid to their employers), and extending the assistance to cover out-of-pocket expenses. But it's time the insurance industry honoured the large (usually extra) premiums paid for income protection insurance and reclassified living donation out of "elective surgery". There's a petition you can sign here. In the meantime, if this ever becomes an issue for you and your family, you'll most certainly want your income protection cover outside of super.   

Nicole Pedersen-McKinnon is a commentator and educator who presents her Smart Money Start, fun financial literacy incursion, in high schools around Australia. Follow Nicole on Facebook.