Changes to superannuation insurance won't jack up rates – but if anything they don't go far enough

May 11, 2018 by Anthony Asher, The Conversation
The government has made life insurance opt-in for younger superannuation fund members. Credit: Shutterstock

The life and disability insurance offered by superannuation accounts can be the best possible deal for members. But the experience is often bitter for younger people, who are "opted in" to insurance they won't need until they have dependants, face administrative hurdles to opt out, and are often charged fees and premiums through multiple super accounts. Many see their small balances disappear entirely.

The latest federal budget proposes to turn this system around by making superannuation insurance opt-in for people younger than 25, and on accounts that are inactive or have a balance of less than A$6,000. However, the changes don't address a more pernicious type of superannuation insurance – total and permanent disability (TPD) insurance.

There are concerns that removing healthy, young people could see the rest of us paying up to 30% more for insurance. But my analysis of superannuation data shows this is unlikely.

The following graph shows that premiums on superannuation insurance (taken from the website of a large fund) are roughly in line with the cost – shown here as the Australian population mortality rate. The lines are roughly the same, meaning that younger people aren't subsidising the insurance of older groups.

Life insurance premiums for people under 25 are very much lower than average. Even allowing refused claims on multiple accounts, the extent of cross-subsidy to older people is minuscule.

The data used for the graph does not differentiate rates by gender, so this is an average of male and female rates – with an allowance for the fact that men earn more and are more likely to be employed. The fund does, however, differentiate by occupation.

As you can see, the rates charged for professionals are much lower than standard rates, which follows the population level fairly closely.

Superannuation funds are in a good position to offer good insurance deals because there are minimal marketing costs, mostly no need for medical evidence, and insurance needs to be integrated with retirement benefits anyway.

The government's changes could save 5 million members up to A$3 billion of unnecessary insurance premiums. But this is an exaggeration as much of the insurance is useful and will not be cancelled.

If there is a large reduction in premiums, it may come from the 6 million accounts where members have lost contact. It is possible that many members or their families are not claiming these insurance policies. If so, premiums for those of us who are aware of our benefits will rise, although certainly not by 30%. If this number is significant it would be unconscionable and would be another matter for the Financial Services Royal Commission.

Changes to superannuation insurance won't jack up rates –  but if anything they don't go far enough

On the other hand

The proposed superannuation insurance changes may may well have unintended consequences. One of the main benefits of automatically enrolling people in insurance is that it removes the need to collect and evaluate health information. This not only reduces costs but means some people are able to get insurance who might be otherwise rejected.

If everyone has to opt in to superannuation insurance, it may mean that people are directed to more costly individual insurance policies. One worst case scenario from the changes is that we see an increase in high pressure sales for these policies.

The federal budget did not address the little appreciated drawbacks of total and permanent disability insurance.

One of the main issues is that the large benefit payable creates a perverse incentive to remain disabled, and can lead to wasteful and destructive legal disputes about whether the claimant is totally and permanently disabled.

TPD insurance does not cover situations where you are partially or temporarily disabled. This leaves members without protection if they are not both totally and permanently disabled.

Lump-sum total and permanent disability claims can also reduce the life insurance payable to the family on the death of a breadwinner. If the breadwinner is disabled and the disability payments are required for his or her maintenance, there may be inadequate cover should they subsequently die.

More to accomplish

The superannuation industry bodies have already created a code of practice where they agreed to restrict the cost of insurance to 1% of salary (or about 10% of premiums) so as not to "inappropriately erode" retirement benefits.

Funds that subscribe to the code promise to consider members' different circumstances when designing cover.

The budget proposals go further than the code—probably too far. For younger people, it would have been sufficient to require superannuation funds to cancel life insurance within five business days of a request to do so. This is already in the voluntary code, so it is quite possible.

But since the government has already found an assertiveness to tackle some of the problem of insurance within superannuation, it would be good to see it looking at the issue of total and permanent disability .

Explore further: Colon cancer survival varies by insurance type

Related Stories

Colon cancer survival varies by insurance type

April 20, 2018
(HealthDay)—Compared to patients with private insurance, colon cancer survival is lower for patients with no insurance or with Medicaid, according to a study published in the May issue of Diseases of the Colon & Rectum.

When tax reform becomes law, ACA's individual mandate becomes history

December 19, 2017
(HealthDay)—With the Republican-led Congress preparing to hand President Donald Trump his first major legislative victory—a massive overhaul of the U.S. tax code—it will mean the end of the Affordable Care Act's controversial ...

2017 will bring premium rate increases under ACA

June 25, 2016
(HealthDay)—Health insurance premiums under the Affordable Care Act will rise in 2017, analysts and insurance brokers say.

Plan to streamline health law re-enrollment

June 26, 2014
New health secretary Sylvia Mathews Burwell says she wants to make it easy for the 8 million Americans signed up under the health care law to renew their insurance next year.

Some win and some lose with 'Obamacare' still around

March 25, 2017
The old and the poor made out great when House Republicans failed Friday to dismantle Barack Obama's Affordable Care Act. The rich and the almost rich didn't do so well.

Administration: 'Obamacare' to offer more choices

May 30, 2013
(AP)—The White House says insurance companies are showing interest in providing coverage under the new health care law, a development likely to increase market competition and give uninsured people more choices than they ...

Recommended for you

Don't eat bitter pumpkin, study warns after women lose hair

May 25, 2018
A doctor warned Friday that bitter-tasting pumpkins and squashes can contain potent toxins, after two women were poisoned by their dinners and lost most of their hair.

Hot cars can hit deadly temperatures in as little as one hour

May 24, 2018
A lot can happen at 160 degrees Fahrenheit: Eggs fry, salmonella bacteria dies, and human skin will suffer third-degree burns. If a car is parked in the sun on a hot summer day, its dashboard can hit 160 degrees in about ...

Research finds a little exercise does a lot of good for ageing muscles

May 24, 2018
Getting old doesn't necessarily mean getting weak and frail – just a little bit of exercise can help maintain muscle mass and strength, Otago research has revealed.

In helping smokers quit, cash is king, e-cigarettes strike out

May 23, 2018
Free smoking cessation aids, such as nicotine patches and chewing gum, are a staple of many corporate wellness programs aimed at encouraging employees to kick the habit. But, new research shows that merely offering such aids ...

What makes us well? Diversity, health care, and public transit matter

May 23, 2018
Diverse neighbors. Health centers. Commuter trains. These community attributes, and other key factors, are linked to well-being and quality of life, according to Yale researchers.

Widely used e-cigarette flavoring impairs lung function

May 23, 2018
A new study has found that a common e-cigarette flavoring that has chemical characteristics similar to toxic chemicals found in cigarette smoke disrupts an important mechanism of the lungs' antibacterial defense system. The ...

0 comments

Please sign in to add a comment. Registration is free, and takes less than a minute. Read more

Click here to reset your password.
Sign in to get notified via email when new comments are made.