Going undercover

First the good news. Millions of Australians gain their life and disability insurance as well as income-protection insurance through their super funds’ default cover. And the level of that default cover tends to be much more adequate than a decade ago. Now the not-so-good news. It can be a costly mistake to assume that your super fund’s default insurance cover is adequate for your circumstances.

Underinsurance in Australia 2014, a 94-page report published over the past week by Rice Warner Actuaries, estimates that the median default cover provided by super funds cover meets 60 per cent of the life insurance needs for average households. However – and this is a big however – the funds’ default death cover meets a much lower proportion of needs for families with children.

Young families with children are calculated to have a “basic level” life insurance need of about $680,000 – $400,000 more than the typical default coverage. (This calculation is based on certain assumptions including that the parents in these families are aged 30.)

Interestingly, half of the $14 billion collected annually in life insurance premiums each year is through super funds for their group insurance cover.

Rice Warner has gathered its superannuation insurance data from 45 industry funds, 14 public-sector funds and six employer master trusts. These funds have a total of 16.5 million members.

The Underinsurance in Australia report makes the crucial point that members’ insurance needs “vary significantly” depending upon the composition of their families.

“This could be addressed by superannuation differentiating members’ default cover by marital status and the number of independent children instead of just age,” the report suggests.

A reality highlighted by the researchers is that the level of default life cover held by the youngest single members of super funds is “likely to be higher than their needs”.

Yet the coverage of members as they grow older and form families and accumulate debt typically falls well short of needs.

Rice Warner says the key challenges for super funds in regard to improving the adequacy of insurance cover for their members are to:

More closely tailor insurance cover for younger people to reduce the possibility of over-insurance given their typically more limited liabilities and responsibilities.
Maintain insurance for older members. Many super funds’ default covers “taper rapidly” as members grow older but their insurance needs may not reduce.
Encourage members to report to their super funds “life events” such as having children, taking a home loan and older children becoming financially-independent. This would assist super funds to fine-tune insurance products to their members’ circumstances.

While these particular pointers are directed at super funds, the report may prompt individuals – perhaps with the guidance of their financial planners – to take the initiative and make sure their insurance is adequate for their family’s circumstances.

Perhaps as starting point, consider feeding your family’s details into an online insurance calculator provided by large super funds. Also, ASIC’s personal finance website MoneySmart has some valuable tips on gaining the right level of cover – inside or outside super.(See Insurance through super.)

One tip is that if you are considering switching super funds to first check whether you will get the same level of life, total and permanent disability and income-protection cover with the new fund – at the right price. This can be particularly critical if you have an existing medical condition.

A core message is not to jump to the assumption that your super fund’s default cover is sufficient your circumstances.

Rice Warner’s research confirms that the levels of underinsurance for permanent disability and income-protection cover are even greater than for life insurance.

Written by Robin Bowerman, Principal, Market Strategy and Communications at Vanguard Australia.

Reproduced with permission of Vanguard Investments Australia Ltd

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