While there is a compelling case for superannuation funds to provide group life insurance, there is a far less compelling case for them seeking to provide income protection insurance, according to actuarial consultancy, Rice Warner.
In an analysis published this week, Rice Warner has stated that the reality is that income-protection insurance is difficult to offer efficiently within superannuation for such reasons as the:
- High cost of providing an adequate level of cover: superannuation funds have to try to find the balance between offering an acceptable degree of cover without diminishing retirement benefits.
- High net worth Australians can afford to buy this insurance outside superannuation, particularly as the premiums are tax-deductible.
- Benefits from income-protection cover only apply to members still working as a means to replace income. This means that members who are temporarily off work through unemployment or maternity leave are paying for the minimum cover — unless they have opted-out — without a potential benefit.
- Usual limit of income-protection benefits to 75 per cent of salary (plus SG contributions) means that members who have cover elsewhere (e.g. with another fund, an employer-owned policy or an industry-based arrangement), and/or receive Workers’ Compensation benefits may have paid for cover yet may be ineligible to receive all the benefits.
- Limit of income-protection benefit payouts by most funds to two years even though income replacement should ideally flow through to retirement — particularly given the role of superannuation in providing for retirement.
It said that if funds wanted to provide income protection cover, they needed to be smarter about segmenting members and tailoring the cover to different groups.
“We believe funds can place more of an emphasis on educating and advising members, including through fund advisory groups, about how much income-protection cover is needed for their circumstances,” the Rice Warner analysis said.
“Second, advise members, again through fund advisory groups, about the most cost-effective way to obtain that cover.”
