Trustees need to take account of insurance costs when considering the degree to which members’ insurance needs are met, according to Rice Warner.
An analysis by the research house also found the median default cover of superannuation meets only about half of the basic death cover needs for households with no children and a much lower proportion for families with children.
The level of default life cover held by young single members was likely to be higher than their needs given that most have no children. However, changing family formation patterns and higher debt levels at older ages means that default cover is often inadequate for older members.
“Superannuation funds have an obligation not to allow the costs of insurance to unreasonably erode members’ retirement incomes. This requires trustees to carefully take account of insurance costs when considering the degree to which members’ insurance needs are met,” the analysis said.
“Nevertheless, the persistent underinsurance of fund members presents continuing opportunities for technological innovation, enhanced member engagement, some creative thinking and further investment by funds.”
Rice Warner said the median level of life cover met only 61 per cent of basic needs, 37 per cent of the income replacement level, and the median levels of total and permanent disability (TPD) cover and income protection cover met only 13 per cent and 16 per cent of their needs respectively.
Rice Warner said steps super funds could take to improve their cover were:
- Differentiating members’ default cover by marital status and the number of independent children instead of merely age;
- Tailoring default cover at younger ages to reduce the possibility of over-providing life cover given that younger members generally have more limited liabilities and responsibilities;
- Maintaining a balance between cover at older ages and the erosion of balances;
- Encouraging members to report life events ¬and whether they had dependent children; and
- Reconsidering the fundamental redesign of their TPD and income protection cover to provide a “disability package” that is closely aligned to needs.
