Many super fund members miss – or don’t really understand – the valuable benefits provided by the insurance cover that comes with their super account. For many of us, it provides a level of personal financial protection we couldn’t otherwise afford.
According to The Future of Insurance Through Superannuation 2022 report prepared by Deloitte for the Association of Super Funds of Australia (ASFA), around $6.6 billion in claims was paid out from these policies to super fund members during 2021.
Despite its many benefits, insurance cover held inside your super fund can be a little tricky to understand. To help cut through the confusion, our simple explainer covers the key concepts to keep in mind when it comes to assessing this important benefit of your super.
Watch: Beginners guide to super and insurance
Camille Schmidt from SuperRatings talks about some of the benefits of being insured through your super fund, what types of insurance you can get, how to think about your insurance needs, how to compare insurance options and why premiums have recently risen.
TranscriptHi, I’m Camille Schmidt, Market Insights Manager at SuperRatings. Really excited to be sharing some insights into superannuation and insurance today.
Well, essentially, it was recognised that Australians are inherently underinsured. And super was seen as one of the most cost-effective ways to provide coverage for as many Australians as possible.
So there’s also a range of benefits to providing insurance through superannuation. So the actual price that you pay can be a lot cheaper. This is because group insurance is based on the risk of the whole of the membership of the super fund and not your individual risk alone.
And when joining an employer, you’ll often get access to insurance rates that your employer has negotiated for you with their insurance provider, so these can be cheaper as they’re essentially buying in bulk the cover levels.
The other benefit is that the premiums are paid out of your superannuation account. So having insurance doesn’t affect your day to day budget.
So there are three main types of insurance offered by superannuation funds.
The first is life insurance. It’s also known as death cover. So essentially what happens with this is in the unfortunate event that you become terminally ill or pass away, your super fund will pay a lump sum benefit to your superannuation account.
The second most common type is total and permanent disability insurance, or TPD. And essentially what happens with this insurance is you receive a benefit to your superannuation account in the event that you suffer from a disability, that means you’re no longer able to work.
The third type is income protection insurance. It’s also known as salary continuance or temporary disability insurance. So with this insurance, you receive a portion of your income, typically around 75% , and that’s paid to cover you in the event that you are suffering from an injury or illness, which is temporary. So these payments can provide a safety net to cover financial responsibilities like your mortgage or other debts to ensure that your family can continue to maintain its current lifestyle if you’re unable to provide for them.
So the calculation design and cover levels can vary considerably across funds, but those three fundamental types of insurance are generally pretty similar.
So it is important to have a look at your cover levels and the premiums you are paying to see how they compare across providers. So this is also due to the underlying demographics of a fund and the rates that they’re able to negotiate.
For example, whether their members are typically younger or older or if they work in higher or lower risk industries. For example, mining would be considered a high risk industry.
So when assessing your insurance needs, you should consider your financial responsibilities and the cost of living that you have. So looking at your budget, how much you need to pay for housing in terms of your mortgage, if you have one or rent, other bills like utilities and childcare expenses.
If you are younger, you might have less debt. But if you are older and have a family and a mortgage, then you may need more cover to ensure you’re able to maintain these payments.
So in some cases, you may not be able to access certain types of insurance through your super. One type is trauma insurance or the income protection insurance offered by your fund may not be as comprehensive as what’s required. So it’s important to have a look at these areas if that’s of interest.
So when you’re comparing funds, it’s important to look at the level of cover as well as the costs associated to ensure that you’re comparing similar offerings. As you may think that your insurance is expensive, but it may be because you’re subject to receive a higher payout.
The devil is also in the detail. So there can be different definitions of what it means to be total and permanently disabled or in order to receive income protection insurance. So it’s important you have a look through these definitions and also compare the terms and conditions or Ts & Cs across funds.
So it is important to look at the time frames and what would be most suitable for yourself. Typically, income protection insurance is offered with the benefit paid for up to two years. Long term income protection insurance is sometimes offered as well with the benefit paid for up to five years.
So about two thirds of funds provide online calculators that can help you assess your insurance needs.
And there’s also advice services offered through your fund which will cover insurance. So it’s important to contact your fund and have a chat and see how they can help you to ensure that your level of cover is going to suit your lifestyle.
So the premium increases are likely to be driven by recent legislation. So there was the Protecting Your Super and the Putting Members Interests First bills which have come into effect. So essentially what’s happened is it’s reduced the number of members who are insured across the market. And because income protection insurance had a smaller pool of members to start with, we’ve seen great increases for this type of insurance.
So we’ve also seen a rise in mental health claims. And this is impacting on premiums for income protection insurance more than death and TPD as well.
COVID is yet to flow through into the figures that we are seeing. However, through our discussions with funds, they do anticipate that there will be a rise in mental health related claims due to this pandemic environment. So that’s one that we’ll continue to monitor to see how that impacts on claims and payout ratios across the industry.
The discussion across the industry continues to focus on the cost of insurance. However, we believe that significant value in having insurance through your superannuation, as it can provide an important safety net when facing hard times.
When it comes to life insurance, most Australians hold their cover through their super account. This is because most super funds offer basic default insurance to members when they join the fund.
In fact, the ASFA Future of Insurance Report found almost 10 million Aussies have at least one type of insurance cover provided through their super.
AdvertisementIn most cases, you receive this default cover automatically when you join the fund (this is called automatic acceptance). You are not required to undergo the normal underwriting process, which often means providing health information or completing a medical examination. Automatic acceptance can be a real benefit for older members, or people with existing medical conditions who can’t access cost-effective cover outside super.
You are free to stick with this default level of cover or to adjust your policy to suit your personal circumstances by increasing your units of cover.
The premiums for default insurance vary and depend on your risk factors. Most super funds deduct your insurance premiums from your account monthly. It’s worth noting that super funds negotiate directly with life insurers to buy insurance on behalf of their members, so your premium is usually cheaper than purchasing a similar policy outside super.
Need to know: Risk factors and loadings
The premium for insurance cover is determined by the level of risk – or the chance of something harmful or unexpected happening – for the insured person.
Insurers assess and price a range of risk factors to work out how much they would need to pay out if you made a claim against your insurance policy. Risk factors can include your smoking status, weight, family medical history and risky hobbies or behaviours.
In a super fund, the insurance risk of all the fund members is pooled, rather than being assessed individually, making cover more accessible for many members who would not otherwise be able to afford insurance protection.
There are risk loadings, however, if you work in hazardous and blue-collar occupations. For example, if you are a ‘light blue-collar’ employee, your annual premium could be 20–40% more expensive than if you work in an office job, as insurers assume you face a higher risk of being injured at work. If you work in a job that insurers consider ‘heavy blue-collar’, your insurance premium could cost twice that of an office worker.
The first thing you need to know about insurance inside super is that it’s not a single type of insurance. In fact, most funds offer three different types of cover to members:
Good to know
Outside the super system, life, TPD and income protection insurance products are often bundled with trauma insurance, which is sometimes called critical illness or recovery insurance.
Under trauma policies, the life insurer pays a lump sum if you suffer a serious injury or critical illness such as cancer or a heart attack. Super funds are not permitted to offer trauma insurance.
Some of the pros and cons of cover in super include:
