MAKE SENSE OF YOUR FUND'S INSURANCE COVER

MySuper products and super funds offer insurance at lower prices because they use their buying power to offer members wholesale group deals. But how do you know your fund's insurance deal 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.
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.
Don't even think about swapping MySuper products or super funds unless you understand how your new super fund's insurance deal compares to your current fund's deal.

Make sense of your funds insurance coverInsurance can be a hard topic to talk about because many of us would rather talk about something else. But it really isn't that hard to understand, it is just that most insurance experts aren't very good at explaining insurance policies and how they work. To fix this, SelectingSuper has created this insurance explainer to help you understand your super fund's insurance deal and show you how to compare it with deals offered by other funds.

Insurance is such a big deal when selecting a super fund or a MySuper product because many of these MySuper products and super funds 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 regular rates.

Buying insurance through your super fund has other advantages too: because the premium prices - the amount you pay for your insurance - 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. Just remember that if you buy your insurance this way you should put a bit extra into your superannuation each year to stop your insurance premiums running down your retirement savings.

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, rather than individually with separate policies for each person. Even better, insurance you buy through your super fund is free of any sales commissions although some super funds might charge you an insurance administration fee of about $1.50 per month.

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., manual workers versus executive managers, heavy blue 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 price they can.

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)

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 policies 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. This standard cover is usually combined Death and TPD cover although some funds also include Income Protection cover. The level of this cover in 2018 averaged up to $210,000 for an average premium of $5.44 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 $750,000.

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 because while they have to look after the member making the claim they also have to protect the other fund members from excessive claims that could lead to increased premiums.

Trustees have to make these judgments - it's part of their job - so when they do this you should remember that they are not trying to hold up payment but 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, many super funds have introduced '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 dependent 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 for funds to administer and this is not how all funds have elected to implement these arrangements.

INSURANCE ALERT WHEN CHANGING FUNDS

Group insurance through your MySuper product or super fund can save you money and be a great deal, 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.

For young people changing super funds this is probably no big deal but if you are older, say in your 40s, 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 jeopardise 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% 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.

Automatic 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 buy $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 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 doing 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% - 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.

The result is that 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.

  Want to know how SelectingSuper compares premiums? Click here
We have already looked at how each of the three main types of insurance are different, so when comparing insurance policies you must first understand which types of insurance you are comparing. But the next question is how do you compare premium 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; 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 using a predefined ratio of the amount of cover; e.g., for every $1,000 in insurance cover, the member pays 74c per annum.

  Make sense of your funds insurance cover 2The unit-price method used to be most widely used by inhouse corporate, public sector and industry super funds, while the fixed-price method used to be most widely used by retail superannuation funds. Now many funds 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 months 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, 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 paid the premium rather than had it bundled as part of your superannuation package. This is something to ask your accountant about at tax time.

Finally, 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. 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 can not do any job for which the insurer thinks you could be suitable. The tighter the definition, however, the cheaper your insurance premiums should be.

 
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.

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