When it comes to personal insurance, having some insurance is better than nothing, however just having an insurance policy in place does not mean you are adequately insured. If you hold your personal insurances through an Industry Super fund, you may not have the insurance cover that you think you do. The true value of any insurance policy comes in the wording of the policy. The devil really is in the detail.
It is estimated that 83% of superannuation fund members use the default insurance policies for their personal insurances[1]. Traditionally, group insurance funded via industry funds is lower in cost when compared with insurance cover offered through retail policies. However, the average increase in premiums for Death and TPD cover over the past four years has ranged from 29% - 45.1% for Not for Profit funds, compared to increases of 2% - 4.1% for Retail Master Trusts. [2]
Industry super funds offer three types of personal insurance cover: Life Insurance, Total and Permanent Disability Insurance (TPD), and Income Protection Insurance.
When considering your personal insurance, it is important to understand the differences between policies held through industry super funds and options available via retail insurance policies.
What to look out for:
Guaranteed Renewable – Yes/No?
One of the most common traps of Industry Super Fund insurance is knowing if the policy is Guaranteed Renewable.
Certain Industry Funds are NOT Guaranteed Renewable which means that your cover can be altered or cancelled by the insurer at any stage. Retail Insurance Policies ARE Guaranteed Renewable so once you have been offered cover and accept the cover, the policy and terms will continue as long as you pay the premium and you have not reached the policy cancellation age.
It’s important to understand the terms and conditions of your insurance cover, should your work situation changes. As the case study below outlines, changes to your work or job circumstances can mean changes to your level of cover.
Case Study – Changed work circumstances
Sarah was working full time as a nurse and held her personal insurances through a prominent Industry Super Fund. The level of cover was appropriate for her and her family’s needs.
As Sarah’s personal family situation changed, she changed her employment status from permanent to casual.
Following her change of work status, the Industry Super Fund sent Sarah a letter stating that her personal insurance cover was too great for a casual employee and that they had reduced her cover by 50%, despite the fact that Sarah continued to pay the monthly premium (at the higher level of cover) and had adequate funds available to pay for the insurance costs.
The letter sent from the Industry Super Fund was dated six weeks after the insurance reduction changes were implemented unbeknown to Sarah, meaning that Sarah was underinsured for six weeks before being notified.
What to look out for:
Life Insurance and Total and Permanent Disability (TPD) Insurance
TPD Definitions and conditions
Changes to TPD definitions in the last few years have meant that some people do not have the cover they think they have. With most retail insurance policies, TPD definitions will refer to “sickness and injury which makes it unlikely that the person will ever be able to work again in ANY occupation for which they are reasonably qualified due to education, training or experience.”
Some Industry Super Funds have included additional conditions to TPD definitions: “or could reasonably be expected to acquire in the future with suitable rehabilitation/training programs.” Industry expert Will Barsby, partner at Shine Lawyers, believes the point of the new TPD definitions implemented by some of Australia’s largest industry super funds, is to limit the amount of successful claims. [3]
These changes mean that the insured has less certainty over TPD claims and whether they will be paid at claim time or be expected to train for work within a different occupation or industry.
Pre-existing conditions
Personal insurance policies within retail funds are underwritten, which means you have certainty about what you are covered for and if there are any exclusions for which you won’t be paid, meaning there will be no surprises should you ever need to claim.
Most insurance policies within Industry super funds are not underwritten and require little or no medical information to be provided, so if you have any pre-existing medical conditions they may not be covered. Some industry funds exclude cover for all pre-existing conditions or exclude them for a certain time period. Unfortunately, in many situations, it is only at claim time that you know for sure what you are, or are not, covered for.
Unit based cover or fixed amount?
Retail insurance policies provide a level of insurance cover that you apply for which is generally indexed in line with inflation.
Many industry super funds provide insurance cover based on units or fixed amounts. Usually unit based cover is linked to age brackets, so as you get older, the level of cover per unit decreases. That is, even if you require a certain level cover, it could continue to decrease as you get older.
What to look out for:
Income Protection Insurance
Working during the waiting period
The terms and conditions outlined in Income Protection Insurance Policies can have huge impacts on your ability to claim.
Retail policies usually require you to be totally disabled, or unable to work, for the first 7 or 14 days before being able to claim.
Certain industry funds require you to be totally disabled, or unable to work, for the entire duration of the waiting period, which can be 14, 30 or 90 days.
Many people claiming Income Protection Insurance will attempt to return to work, both for their own wellbeing or so they don’t let the business down. However, returning to work during the waiting period will generally mean restarting the waiting period before being able to claim.
Offset clauses
Some Income Protection policies have offset clauses which can reduce the income protection payment made. These ‘offsets’ will be any other amounts paid such as worker’s compensation, sick leave or annual leave. It’s important to understand what offset clauses your Income Protection policy has so that you know how much your policy will pay should you make a claim.
While there may be cost advantages associated with insurances held in Industry Superannuation Funds, typically industry fund policies offer a basic level of cover only, which are not tailored to the specific circumstances or stage of life for the individual.
Additionally, there are many considerations that can impact on the insurance cover and the amount paid in the event of a claim which need to be clearly understood. These are just some of the questions, we as your financial adviser consider:
- Could the insurance cover end without notice?
- Is it subject to waiting periods?
- If an individual’s job or working circumstances were to change, would it affect the amount of cover?
- What happens if employer super contributions stop, and
- If you change super funds, will you still be covered?
We believe a comprehensive financial plan is as much about protecting wealth as it is about wealth creation. Safeguarding your lifestyle through insurance can be confusing, especially as your risk protection needs change at different stages of your life. Seeking professional assistance can help you to navigate the wide range of personal insurance options available and allow a proper assessment of the appropriateness of those policies for individual circumstances.
To review your personal insurance cover, I invite you to contact us on (07) 3720 1299 or email admin@wealthfundamentals.com.au
1. http://www.canstar.com.au/superannuation/life-insurance
2. SuperRatings Media Release May 2016 http://www.superratings.com.au/media/mediarelease/020516
3. http://insuranceadvisoryservice.com.au/changes-to-insurance-from-industry-super-funds
Lane Moses Pty Ltd ABN 56 092 186 117 trading as Wealth Fundamentals and its advisers are Authorised Representatives of Fortnum Private Wealth Ltd ABN 54 139 889 535 AFSL 357306. This is general advice only and does not take into account your objectives, financial situation or needs, so you should consider whether the advice is relevant to your personal circumstances. You should also read the relevant Product Disclosure Statements (PDS) before making any financial decisions”.