MAKE SENSE OF YOUR FUND'S INSURANCE COVER

MySuper products and super funds use their group buying power to offer members insurance at wholesale prices. But how do you know if your fund's insurance policy is any good?

Key points

	Insurance offered by your MySuper product or super fund can be cheaper because your fund groups its members under a single wholesale insurance policy.
	Insurance bought through your fund is held in the name of the super fund trustees, so it's different to normal insurance policies that you hold directly in your name.
	Your super fund gets a tax refund equivalent to 15% of the premiums you have paid for your insurance cover. Funds use this refund to either reduce your net premiums, reduce the fees they have to charge you, or to defray other fund operating expenses.

Insurance is a big deal when selecting a super fund or a MySuper product because many of them use their buying power to obtain insurance at wholesale group rates that can often be cheaper than if you purchased the same insurance cover yourself at the regular rates you'd have to pay as a private individual.

Buying insurance through your super fund has other advantages too: because the premium prices — the amount you pay for your insurance, sometimes callled the 'insurance fee' — are taken out of your pre-tax super contributions it is effectively paid through your employer so you don't have to send the insurance company a cheque each month from your take home pay.

Group insurance

Super funds and MySuper products can offer these insurance deals because they group their members together into very large, combined wholesale insurance policies. This enables them to buy insurance at cheaper 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. Even better, insurance you buy through your super fund is free of any sales commissions although some super funds might charge you insurance administration fees.

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 may, however, split members into higher risk or lower risk occupational groups, e.g., trades workers versus executive managers, heavy blue collar versus light manual, and white collar versus professional. By choosing the right occupational risk grouping super funds are able to offer insurance at the lowest premium prices they can.

Types of insurance

Life insurance you buy through your super fund usually comes in three main types:

1. Death only

This pays your nominated beneficiary a set amount upon your death.

2. Death and total and permanent disability (death/TPD)

This is the most common type of insurance you can get through your superannuation. It includes death only insurance but you may also be able to claim against your insurance policy if you are catastrophically injured or cannot work again because of a disability, subject to the policy's terms and conditions. If you make a TPD claim, 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 may be able to 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. While not many super funds currently offer these arrangements they are gradually becoming more common.

STANDARD INSURANCE COVER When you join a MySuper product or a super fund you usually have to buy a minimum level of insurance cover. The graph below shows standard death and TPD cover. This standard cover is usually combined Death and TPD cover although some funds also include income protection cover. The level of this cover in 2020 averaged up to $189,000 for an average premium of $5.72 per week if you were 40 years of age. Note, however, that the range of insurance can vary significantly between funds, e.g., some funds offer almost $460,000 in standard cover.

Binding beneficiaries

One thing to remember when buying insurance through your MySuper product or 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 — but unfortunately this can sometimes cause problems for the member's dependants who are making the claim.

To minimise the chance of this happening many super funds have introduced 'binding beneficiary' nominations. These guide the fund into paying the insurance benefit to a specific person nominated by the deceased super fund member even if that person is not the person's dependant or immediate family.

INSURANCE FOR YOUNG PEOPLE OR THOSE WITH A LOW ACCOUNT BALANCE If you are younger than 25 years of age or have super account balance under $6,000 you no longer have to purchase your fund's standard cover insurance. But you can opt-in if you wish.

Automatice acceptance limits (AALs)

Super funds that offer large choices of insurance 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 get $500,000 in insurance cover without having to answer more detailed questions or submit to a medical examination — a process called underwriting.

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 big deal.

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 doing this could raise the risk of you being refused insurance cover if a major medical problem is found.

However, where AALs are a big issue is when companies transfer their super into a new super fund.

This is because sometimes the AALs are based on a predetermined proportion — say 75% — 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. This could lead to the premiums going up.

Claims experience

While all insurance policies may appear similar, figures published by the superannuation regulator APRA have shown that there are large differences between insurers regarding how quickly they pay claims. For example, it takes on average one month for insurers to process death claims, six months to process TPD claims and two months to process income protection claims. However, some insurers have been found to take much longer.

CONSUMER WARNING POLICY TERMS & CONDITIONS Choosing the right insurance is not just about price, you should also check the policy terms and conditions. This matters because funds' policies can have subtly different definitions of what they call a disability. For example, if you are catastrophically injured some policies may pay you out if you can't do your current job but others may only pay you out if you cannot do any job for which the insurer thinks you could be suitable. The tighter the definition, however, the cheaper your insurance premiums should be — which is why some super funds, in an effort to keep their premiums low, are doing this.

Insurance alert when changing funds

Group insurance through your MySuper product or super fund can save you money, but the insurance is only very rarely transferable to other super funds. This 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.

So, if under super choice 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 age 40 and have insurance through your super fund you should be 100% 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.

HOW SELECTINGSUPER COMPARES PREMIUMS 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; e.g., $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 by multiplying the price per $1,000 of cover by how many thousands of dollars in cover you want e.g., for every $1,000 in insurance cover, you pays 74c per annum, so $300,000 cover costs 74c x 300 which is $222 per year. The unit-price method used to be most widely used by in-house corporate, public sector and industry super funds, while the fixed-price method used to be most widely used by retail superannuation funds. Many funds now, however, offer their insurance using both pricing methods. 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. Another thing to watch if a super fund offers their insurance using both premium methods is that the premium deals are not always in sync so you may end up paying higher premiums just because you chose the wrong payment calculation method. For income protection insurance, you also need to consider: The waiting period — 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 — how long your benefits will be paid until you have to apply for a full TPD payout, assuming 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 by you. This is because your super fund has already claimed a tax deduction for buying the insurance policy.