Is Default Insurance Within Super Worth It Anymore?
Many of us are familiar with the saying “The only constant in life is change”. This is definitely the case for financial services & particularly for superannuation in Australia.
Superannuation has come a long way over the last few decades. Back in the day the average person on the street couldn’t tell you what superannuation was. Today it is the main investment vehicle used to save for retirement.
Apart from the savings & accumulation element of super, automatic insurance cover was introduced to offer some protection to the fund members. The cover types & levels would vary depending on which super fund you were with, although Life & Total & Permanent Disability (TPD) insurance is usually standard within the industry.
As a member of a superannuation fund, you’re not expected to be an expert when it comes to insurance cover. By all means do what you can to educate yourself, however I would think that most members wouldn't be familiar with the details of their cover.
To save you some time, I can tell you that automatic default insurance within super is very ordinary! The quality of the cover does vary depending on which industry super fund you are with, however generally speaking, the terms & definitions can be substandard. For certain clients however, default insurance still plays an important role, although my job is to try & source the best cover options where possible.
I don’t blame you if you think that I'm a little biased, given that I represent the retail insurance industry. Fortunately for me, I don’t have to try overly hard to convince people, as the superannuation trustees are making my job easier.
Before I highlight some of the major concerns regarding automatic default cover, you need to first check to see if you have existing cover in place. This would be my first criticism due to recent changes made within super, making it harder to qualify for cover or retain existing cover.
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For those of you who are lucky enough to still have default insurance in place, here are some facts to ponder over.
Insurance policy wording or definitions were never the best to start with, although in many cases it is becoming harder to claim on your cover. This is particularly true for TPD & Income Protection (Salary Continuance). Superannuation funds are tightening parameters mainly due to a combination of increasing claims along with the impact of COVID-19. When you get a chance carefully read through your insurance details within your super funds product disclosure statement.
Default insurance cover levels are designed to decrease as you become older. This is counterproductive given that you are more likely to claim on your cover as your health deteriorates over time. Many benefits also cease at age 60 or 65 unlike retail cover which can remain in place for many more years if needed. Take note that today, people are living longer so therefore working longer.
To add insult to injury, automatic default insurance premium rates are staring to escalate significantly within certain funds. This once again is due to a combination of the current environment along with changes made to insurance within super. In other words, the cover is becoming less attractive whilst premium costs increase.
In my opinion the only exception for a member to consider default insurance would be if they are ineligible from a health perspective for superior retail insurance. In such cases having some cover in place is better than none.
As disappointing as these changes are for the industry and for members, it is definitely making my job easier as an insurance adviser. It is becoming a no-brainer for potential clients that I come across to be able to offer them superior retail cover at competitive premium rates!
Senior Consultant, Private Wealth at BDO in Australia
3 年Fair comments from John Farrington. There are a lot of Australian families that are better off as a result of "ordinary" default insurance cover being in place at the right time. There is nothing wrong with the default cover process. What is "wrong" is our ongoing inability to educate the masses about understanding how their super works and what it provides to them.
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3 年I've got say that your article is full of generalisations and a number of these are simply wrong. The reality is that the definitions for Death Insurance haven't changed for some time. Lack of life is relatively easy to prove. The definitions for Total and Permanent Disablement have varied over the years but these days the vast majority of funds pay out legitimate claims. These are the two main sorts of coverage provided by super funds. Sure premiums have increased in recent times, but I think that's across the retail sector as well. However, the key point is that if we didn't have insurance in super, there would be a huge proportion of the population who had no cover at all. People generally don't buy life insurance. It has to be sold to them, and I guess that's the basis of your business model. I think that would be a far worse outcome than the current situation.