The truth about insurance in your superannuation fund
Here at Skye, we’re passionate about insurance. Specifically personal insurances, such as Life, Total and Permanent Disability (TPD), Trauma and Income Protection Insurance. Unfortunately, not all personal insurance policies are created equally, and the cover you get from Insurer A vs Insurer B might be the difference between a successful insurance claim or a difficult, if not impossible battle to receive support when needed.
Many people rely on the default insurance cover provided to them when they open their super fund. This is what is referred to as a type of group insurance.
Group insurance refers to insurance where an employer or trustee of a superannuation fund purchases an insurance policy to provide cover for a group of employees or superannuation fund members, with the insured amounts determined by a formula. The cover is automatically accepted up to certain limits without medical underwriting as there are rules that apply to the whole group.
However, this isn’t the only type of insurance out there, and it is far from the best in many cases. Where possible, we encourage Aussies to explore what is called retail insurance. Retail insurance is comprehensive, medically underwritten (so you know what you can and can’t claim on from day 1, instead of at claim time), can’t be altered, and is generally accessible through a financial adviser.
So, what are the major differences?
Group Insurance vs Retail Insurance - the basics
Cost - Although the default insurance you have in super might be pretty cheap, often that is because your level of cover is low and likely insufficient for your needs. More often than not, we find that group insurance becomes more expensive than comparable retail cover when sums insured are increased to a level you might actually need.
Premium types - Group insurers generally only offer age-based or stepped premiums, while retail insurance policies allow you to select between stepped and level premiums. Level premiums allow you to lock in a lower premium at a younger age, which is great for younger policy holders. Stepped premiums become more expensive as you get older. There is no right or wrong, but it is great to have choice!
Payment options – One of the reasons people stick with their insurance through super fund is that they don’t need to personally foot the bill, as the premiums are debited from their super balance. With retail insurance, you can do the same thing! In fact, you can choose to pay through super, from your cashflow, or a combination of both. You have the option to choose what works best for you.
Renewability - Group insurance contract terms are subject to negotiation between the employer/superannuation provider and the insurer and can change at any time. Often the quality of the policy is reduced. A common example is changing TPD definitions, therefore making it more difficult to make a successful TPD claim. In contrast, a retail insurance policy contract is generally ‘guaranteed renewable’ and therefore can only provide additional or upgraded benefits while your policy is in force. You will never see a downgrade in your retail policy’s benefits once in force.
Medically underwritten - Default group insurance cover is often not medically underwritten, and you might find that they wish to assess your medical history at claim stage to determine any pre-existing conditions that may have been in place at the time of application. Retail insurers assess this information up front, so you are fully aware of what you can and can’t claim on in the future.
Inability to pre-assess medical history - Insurers may place exclusions or premium loadings, or decline cover entirely based on your medical history, occupation or pastimes. When applying for group cover, you’re taking a bet on one insurer, with no way to ascertain what the offer of terms will be without first lodging an application. This makes it difficult to avoid potential declines, which need to be disclosed in all future insurance applications. With retail insurance, we provide your medical background to a number of insurers via a pre-assessment to understand what exclusions, loadings, or even declines might be applied in a pre-assessment process. 80% of our clients get different outcomes from different insures based on these preassessments. Therefore, we can understand fully what your options are with multiple insurance providers before we choose how to proceed.
Cover can reduce over time - Group insurance policies will often give you a default amount of cover based on your age. This can decrease as you get older. Essentially, one day you might wake up one day with less insurance cover than you had yesterday. Don’t rely on your super fund insurance to be adequate, because it will change over time!
Indexation: In contrast to group cover often reducing as you age, retail policies allow you to automatically index or increase your sum insured each year to keep pace with inflation and the rising cost of living. You can also access features such as ‘increasing claims’ on your income protection, which means that while on claim, your monthly payments will increase over time with inflation, as opposed to staying stagnant.
Less Flexibility - Group insurance is tied to your super fund. If you change super funds, your contributions end, or your super account becomes inactive, your group insurance may be cancelled, and you could end up with no insurance. If you wish to move funds, you may have to give up the insurance and reapply with now potentially pre-existing conditions. Retail insurance policies are not generally affected by these issues as you can easily change your super fund, and simply let the insurer know which fund to debit future premiums from.
That is an overall summary of some of the differences between group and retail cover. Want an even more detailed breakdown based on the type of cover you may be considering? Keep reading…
Impacts on individual policies
Life Insurance
Life insurance pays out in the event that you pass away, and it is more or less the same regardless of whether you choose group or retail cover. If you pass away, and a death certificate is provided, the benefit will generally be paid out to your beneficiaries without issue. However, group cover it is prone to some of the restrictions outlined above, such as an inability to have level premiums if that option is best for you. Also, your amount of life insurance could be reduced by your super fund.
TPD (Total and Permanent Disability) Insurance
TPD insurance pays you a lump sum in the event that you are totally and permanently disabled and can vary greatly depending on where you take out this cover.
One example is the occupation definition. Through super, your TPD will generally have an ‘any occupation’ definition, which means in order to claim, you’d need to be disabled to the point that you are unable to work in any occupation. Some any occupation definitions in group cover are becoming so broad that you’d almost need be unable to do anything at all to make a claim.
Through retail insurance, you may be able to access an upgraded 'own occupation' definition. This means, in order to claim, you’d just need to be unable to work in your own occupation specifically. This gives you the peace of mind that in the event you could never do your job again, you’re not being pushed back into working in a job you may have done as a teenager.
One of the stranger developments we have seen in recent times is select group insurers offering TPD policies that appear to be a lump sum payment, but in fact, this is broken up into small incremental payments each year. The insurer annually re-assesses your ability to work, and have the ability to end the payments without paying your full entitlement if that becomes true.
Income Protection Insurance
Income Protection pays you out a monthly benefit in the event that you are off work due to illness or injury, and by far has the most differences when it comes to group vs retail cover. Being the #1 most claimed policy of all the types we’re discussing in this article, this is one you really want to be able to rely on when needed. A few examples of the differences are as below.
Income Protection through super is not tax deductible. When you own a retail income protection policy personally, the premiums can be claimed as a tax deduction.
Having an income protection policy wholly owned through super comes with stricter conditions to claim, as the illness or injury needs to meet the super fund's condition of release. An example of this is if you became ill or injured while between jobs (for example, you took two weeks to go on holiday before starting with a new company) your super fund’s income protection would not pay out. With a retail policy owned partly or wholly outside of super, there is no requirement for you to have been employed at the time of injury or illness to be eligible, increasing your chances of a successful claim.
Most group insurance policies will pay out for a maximum of 2 or 5 years, with limited providers offering a benefit period until age 65. Retail insurance will, for most cases, offer the benefit period until age 65. This means more cover, for longer. Check out our article here on the importance of age 65 benefit periods.
In some cases, your income protection could be cancelled while on claim. An example of this is a super funds who may include in their contract definitions that they will stop paying your income protection benefit once a successful TPD claim is paid. Australian Retirement Trust or ART, one of Australia's biggest group insurers, use this rule.
Trauma Insurance
Trauma insurance pays out a tax-free lump sum of money in the event that you are diagnosed with a serious illness such as cancer, heart attack or stroke. This is generally fast paying and can assist with medical costs, time off work for yourself or your partner, or income replacement. See our article on trauma insurance and why you need it here. Unfortunately, trauma insurance is not available through group policies in superannuation.
What should I do now?
The above points might make your group insurance policy through super seem like a waste of money. Maybe you think that you’d be better off cancelling it entirely. Do not do this! There are many reasons it may be in your best interest to keep your group insurance policy, and your unique situation should be assessed before making any decisions on insurance. Never, ever cancel an insurance policy before a new appropriate policy is in place.
That's why it's super important to chat with a financial adviser who knows their stuff when it comes to personal insurance. They'll be able to help you figure out the best options for you.