Finance Your Super Some super needs protection from fund premium erosion

Some super needs protection from fund premium erosion

Young worker insurance.
Some young workers may not be suited by group life insurance. Photo: Getty
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Superannuation funds need to do more about informing their members about the circumstances under which their account balances are being eroded by insurance premiums.

The Joint Parliamentary Committee inquiry into the life insurance industry has been told by specialist lawyer, John Berrill, that the erosion of premiums represents a significant problem for members.

However some funds are handing it better than others.

Under questioning from Queensland Liberal Party parliamentarian, Bert van Manen, Mr Berrill cited building industry fund, Cbus, as an example of a fund which handled the issue better than other funds.

“…Cbus has actually a very sophisticated process by which they tell people that their account balance is about to fall below the threshold and that their insurance cover will soon cut out, so if they want to do something about it they have to make a contribution,” Super Review has reported.

Insurance premiums are a problem particularly for small, inactive accounts where the amount taken out for premiums is a significant per centage of the overall fund which is not being added to.

Mr Berrill’s law firm, Berrill & Watson, in its submission( Sub_019) to the Parliamentary Inquiry, observed that the recently introduced Life Insurance Code “does not cover group insurance sold through superannuation which currently accounts for approximately 70 per cent of all life insurance sold in Australia.”

However this was being addressed with an advisory council working to create parallel structures.

“On most measures, group insurance compares favourably. Most cover is offered on an automatic acceptance basis, the loss ratios of TPD (total and permanent disability) claims for example are up to 90 per cent and the group insurance policies tend to be relatively uncomplicated as they are generic and not tailored,” the report said.

The high loss ratios suggests that TPD claims on group policies are not being unfairly refused as has been alleged in the case of CommInsure.

“There have been questions raised recently about rejected group life claims although the high loss ratio figures would tend to indicate that consumers have successfully claimed benefits under group policies,” the submission said.

“It has also been said that default insurance cover offered by superannuation funds on an opt out basis is poorly targeted, particularly to younger people who do not have dependents and therefore do not need death insurance cover,” the report said.

The report found that death cover for younger workers was poorly targeted, with too little opportunity for them to opt out. However when it comes to TPD insurance for younger workers, targeting was adequate “particularly given the chronic under insurance problem in Australia”.

“The 2016 Rice Warner report ‘Underinsurance in Australia’ found that the median underinsurance gap between the amount of cover required and the amount actually held was 63 per cent for income replacement, 87% for Total and Permanent Disability (TPD) and 84 per cent for income protection insurance

The same authors specified in their 2014 report that the proportion of total life insurance held within superannuation funds was 71 per cent for death cover, 88 per cent for TPD cover and 59 per cent for income protection cover.

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