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Beyond the surface
On July 1, 2005, choice of superannuation fund obligations began for employers. Each employer was required to offer their employees the choice of superannuation fund by July 29, 2005, which includes insurance cover (subject to particular exemptions).
On the surface, this appears to benefit employees by providing them with a minimum level of life insurance cover. Unfortunately, many Australians have a false sense of security that this level and type of insurance cover is adequate; regretfully, this is not the case.
Employers must meet one of two minimum requirements: A premium of at least $0.50 per week per employee ($26 per year). Or $50,000 of life insurance for employees aged 20 to 34, $35,000 of life insurance for employees aged 35 to 39, $20,000 of life insurance for employees aged 40 to 44, $14,000 of life insurance for employees aged 45 to 49, $7,000 of life insurance for employees aged 50 to 55, and no requirement for any employee aged 56 or over. The type of cover is life insurance only (ie, death cover or term). The minimum insurance provided would barely cover funeral expenses, and do not provide any cover for total disability or salary continuance.
In the fine print, employers have various exemptions that allow them to ignore the requirement to provide insurance. There is a transition provision that exempts an employer from providing insurance if they continue to contribute to the existing default fund until June 30, 2008, (three years away). If the superannuation contributions are made under a Federal award or retirement savings account, then the employer is exempt from providing (offering) insurance. A superannuation fund may also refuse cover for an employee based upon an employee’s occupation, health or hours worked. An employee may change funds only to realise that they do not have any insurance cover.
When you realise the low sums provided ($50,000 maximum), the limitation of cover (death cover only), and the numerous exemptions, choice of superannuation fund requirements does not provide suitable insurance benefits.
There are some employers who have been very generous to their employees by offering term and total and permanent disability (TPD) insurance for amounts (sums insured) of up to four times an employee’s salary. Thus, if an employee is earning $52,000 per annum, then the employer may have provided up to $208,000 in term and TPD insurance. This appears to be very generous, until you realise what the purpose of these insurances are: to eliminate debt and create an ongoing income.
Currently, the average home loan in Australian is $226,976, and buying a home in Australia takes 4.3 times household income. Thus, if a member of a superannuation fund dies or becomes permanently disabled, it is very likely that the benefits paid from the superannuation fund will be inadequate for the member — failing to either eliminate the mortgage or create a reasonable ongoing income.
Considering that 585,000 Australians are permanently unable to work and 132,500 Australians die each year, this means that one in 28 Australians may be affected each year.
Any adviser who has the opportunity to discuss choice of superannuation fund with a client should encourage their client to review their life insurance. Purchasing an individual policy, which can be tailored to provide appropriate levels of insurance for the client’s individual needs, will continue to provide cover regardless of the employer or superannuation fund chosen.
AUTHOR
Mike Taylor
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