Insurance – one size does not fit all

Superannuation funds need to consider different types of default insurance cover which better reflects the status of their members, according to leading actuarial research house, Rice Warner.

The firm has published an analysis in which has examined the shortcomings of the current insurance within super regime and suggested that some significant challenges exist in making insurance cover appropriate in circumstances where one size does not fit all.

"Perhaps the biggest challenge for superannuation funds in providing appropriate and adequate life, TPD [total and permanent disability]and income-protection cover is that the insurance needs of members vary significantly depending upon the composition of their families," it said.

The analysis suggested that this could be addressed by funds differentiating members' default cover by marital status and number of dependent children instead of just by age.

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It said that, ideally, fund data bases should record the family characteristics of their members.

"The level of default cover held by young single members, is likely to be higher than their needs given that most have no children," the analysis said.

"In contrast, the insurance needs of members tend to increase with age as they form families and accumulate debt. Yet the typical default cover meets only about 30 per cent of the basic life insurance needs for families with children."

Rice Warner suggested there were steps which superannuation funds could take to improve the adequacy and appropriateness of their insurance cover offerings including:

• Differentiating members' default cover by marital status and the number of independent children instead of merely age.
• Tailoring insurance cover for younger people to reduce the possibility of over-insurance given their typically more limited liabilities and responsibilities.
• Maintaining insurance for older members. Many superannuation funds' default covers taper rapidly as members grow older but their insurance needs may not reduce.
• Encouraging members to report to their superannuation funds life events such as having children, taking a home loan and older children becoming financially-independent. This information would assist funds to better align default cover to their members' circumstances.
• Considering the fundamental redesign of their TPD and income-protection cover to provide a "disability package" that is closely aligned to needs.

The analysis said members should not assume that their superannuation fund's default cover is adequate for their circumstances because it almost certainly was not.