Super funds offer insurance because their buying power often means they can offer better deals than if you applied directly to an insurance company. But how do you know if your fund's insurance deal is any good?
By Andrew Keevers and Alex Dunnin

KEY POINTS
Super funds can use their buying power to give their members a good insurance deal. If you buy insurance through a super fund, try to top up your contributions so you don't erode your super savings. Different insurance policies can have different wordings and definitions. Insurance bought through your fund is held in the name of the super fund trustees, so it's a little more different than normal insurance policies that are held directly in your name. Don't even think about swapping super funds unless you understand how your new super fund's insurance deal compares to your current fund's deal.

Insurance is one of the most boring words in the English language. And because it is so boring people usually ignore it until it's too late. But insurance isn't really that hard to understand, it is just that most insurance experts are so unbelievably bad at explaining it. Nonetheless, insurance is very important, and you owe it to your family to try to make sense of it, despite the best efforts of the experts to confuse us.

Why is insurance such a big deal when selecting a super fund? Because most super funds use their buying power to buy insurance at rates that can often be cheaper than if you purchased the same insurance from the insurance company yourself at their regular rates.

Because the insurance is packaged with your super fund, it is easy to pay because it's paid out of your super contributions - it is effectively paid through your employer and so you don't have to send them a cheque each month from your takehome pay. But if you use super to buy insurance, you should remember to put a bit extra into your super fund each year so that your super savings don't run down. After all, you need this money to help save for retirement.

Note that the amount you pay for your insurance is called your 'premium'. Insurance policies don't often talk about their 'price' or what they 'cost'; they use words such as 'premiums' or 'premium rates'.

Group insurance

Super funds can offer insurance deals because they group their members together into very large, combined insurance policies. This enables them to buy insurance at wholesale rates. These wholesale rates are sometimes called 'group insurance' rates because large groups of super fund members are insured under a single insurance policy, held in the name of the super fund's trustees, rather than individually with separate policies for each person.

These super fund group insurance policies can also be simpler than regular insurance because they are usually based solely upon the member's age, or other overall characteristics of the group. Some super funds also split members into higher risk or lower risk occupational groups, eg, manual workers versus executive managers. And some funds, often personal master trusts, will even split their members into many risk groupings so that members can find an insurance premium rate that closely matches their true risk profile.

Types of insurance

Super funds usually offer three main types of life insurance:

1. Death only
   This pays your nominated beneficiary a set amount upon your death.
   
2. Death and total and permanent disability (death/TPD)
   Includes death only insurance, but you are also able to claim against your insurance policy if you are catastrophically injured or cannot work again because of a disability. If you make a TPD claim though, upon your death your insurance cover reduces to the balance of the overall insured amount not already paid.
   
3. Income protection (IP)
   Sometimes also called 'salary continuance insurance', 'sickness and accident insurance' or 'temporary disability insurance'. If you cannot work because of injury or temporary disability, you can claim part of your lost salary while you are recovering.

Some funds may also offer home and contents insurance and health insurance, though this is usually done through the fund obtaining a special deal with an insurance company so you get the insurance at a discount. Not many super funds currently offer these arrangements, but they are gradually becoming more common.

Binding beneficiaries

One thing to remember when buying insurance through your super fund is that because the trustees hold the policy rather than you, if you or your estate ever has to make a claim, the trustees are obliged to check that the person making the claim is doing so legitimately. Trustees have to make these judgments - it's part of their job - so when they do this they are not trying to hold up payment as they are just doing what the law says they have to do.

Unfortunately this can sometimes - though only extremely rarely - cause problems and so to protect members against the very remote chance of complications arising, some super funds are now introducing 'binding beneficiary' nominations that lock them into paying the insurance benefit to the specific person nominated by the deceased super fund member, even if that person is not the person's dependant or immediate family.

While the 'binding beneficiary' rules guarantee that your insurance payout will go to the person you nominate, these rules are expensive and complex to administer, and this is why few funds have elected to implement these arrangements.

Automatic acceptance limits (AALs)

Super funds usually have pre-set maximums for how much insurance members can buy without needing to undergo a medical assessment. These maximum amounts are referred to as automatic acceptance limits (AALs). For example, your fund may have an AAL of $500,000, which means you can buy $500,000 in insurance cover without having to submit to a medical examination.

The premium rates for cover above the AAL are nearly always the same as for below AAL cover, so in many ways the AAL in itself is not really a major pricing issue. Still, in order to access more insurance cover than stipulated by the AAL you may have to undergo a medical assessment. The problem is that To this could raise the risk of you being refused insurance cover if a major medical problem is found.

However, where AALs are a real issue is when companies transfer their super into a new super fund. This is because sometimes the AALs are based upon a predetermined proportion - say 75 per cent - of all the company's employees taking up the insurance offer. This means if not enough employees take up the offer then the AALs may not apply as generously as first thought and all members may even need to undertake medical assessments.

If under super choice a company's employees start to choose their own super funds rather than using the company's default super fund, these AAL take-up deals may start to fall through. If this happens at your company, then watch out in case the super fund increases the premium rates. This is because the premium prices go up as fewer people from your company are receiving the insurance deal because your combined buying power diminishes.

How SelectingSuper compares insurance prices

Each of the three main types of insurance is so different that when comparing insurance policies you must first understand which types of insurance you are comparing. The next question is, how do you compare prices?
There are two main methods super funds use to describe how they calculate their insurance premium rates:

• The unit-price method .
  A member buys predefined amounts of insurance cover for a set premium; eg, $70 000 cover (sum insured) for $1.00 per week. Members can then buy more insurance cover simply by buying more units.
  
• The fixed-price method .
  Members can buy whatever amount of insurance they like, and the premium is derived using a predefined ratio of the amount of cover; eg, for every $1000 in insurance cover, the member pays 74¢ per annum.

The unit-price method is most widely used by inhouse corporate, government and industry super funds, while the fixed-price method is most widely used by master trusts. A trick to watch for when comparing insurance policies is whether the premiums are described in per week, per month, or per annum terms. It's not always as clear as it should be.

For income-protection insurance, you also need to consider the 'waiting period' and the 'benefit period'. The waiting period refers to how long you have to be sick until you can apply for your benefit. The most common waiting periods are 30 days and 90 days, though some funds use 45 days and some funds use six-month waiting periods. The general rule is that the longer the waiting period, the cheaper the insurance premiums.

The benefit period refers to how long your benefits will be paid until you have to apply for a full TPD payout, assuming of course you have TPD insurance. Most super fund insurance policies have a two-year benefit period, though a very small number have benefit periods that extend up until your normally expected retirement age of 55 to 65 years. Normal income-protection insurance bought directly from an insurance company has this extended benefit period as standard.

Income-protection premiums paid through your super fund are sometimes tax deductible for a short time depending upon your individual circumstances, though for many people they are not normally tax deductible. The complication is that because your insurance premium is deducted from your superannuation account rather than actually paid by you as a cash amount, it can sometimes be difficult to convince the Australian Taxation Office that you actually paid a premium rather than had it bundled as part of your superannuation package.

If you wish to try to claim your income-protection insurance premiums paid through your super fund as a tax deduction, you should, of course, ask the Taxation Office or seek advice from your accountant as it could impact the true after-tax price of the insurance.
Understanding insurance is not just about price as for TPD and income-protection insurance it is also important to check the policy conditions, as funds can have subtly different definitions of what they call a disability.

Insurance Alert When Changing Super Funds

Group insurance through your super fund can save you money and be a great deal. But the insurance is only very rarely transferable to other super funds, which means if you are thinking of changing super funds and you want insurance as part of your new super fund you must first check if the new super fund's insurance is as good as the insurance of your current super fund. For young people changing super funds this is probably no big deal but if you are older, say in your forties, this can be much more crucial. This is because once you hit age 40 insurance conditions can get tougher and you may find you have to take a medical assessment. And if the assessment turns anything up it may jepardise your insurance altogether. So under super choice if you are tempted to change super funds and you have insurance through your current super fund, please first check the insurance arrangements of the new fund before doing anything. In fact if you are over 40 and have insurance through your super fund you should be 100 per cent certain that the new fund will accept you for insurance. If you have the slightest doubt then get a written promise from the new fund that they will offer you a policy.

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