- On April 28, 2016
What can superannuation funds and their members do to reduce Australia’s significant and persistent underinsurance gap?
This is a critical question given that superannuation funds provide about three-quarters of life insurance cover in terms of policy numbers and the high level of underinsurance in Australia. (Rice Warner INSIGHTS, April 20.)
A couple aged 40 with children need life insurance cover equivalent to about ten years of income for the higher-earning partner simply to repay debts and maintain current living standards following a partner’s death.
However, for the family to fully maintain their living standard, life insurance cover of more than 15 years of income for the higher-earning partner is needed. Similarly, total and permanent disability (TPD) cover equivalent to 14 to 15 years of income is required.
Perhaps the biggest challenge for superannuation funds in providing appropriate and adequate life, TPD and income-protection cover is that the insurance needs of members vary significantly depending upon the composition of their families.
This could be addressed by funds differentiating members’ default cover by marital status and number of dependent children instead of just by age. Ideally, fund data bases should record the family characteristics of their members.
The level of default cover held by young single members, is likely to be higher than their needs given that most have no children.
In contrast, the insurance needs of members tend to increase with age as they form families and accumulate debt. Yet the typical default cover meets only about 30% of the basic life insurance needs for families with children.
What superannuation funds can do
Steps that superannuation funds can take to improve the adequacy and appropriateness of their insurance cover include:
- Differentiating members’ default cover by marital status and the number of independent children instead of merely age.
- Tailoring insurance cover for younger people to reduce the possibility of over-insurance given their typically more limited liabilities and responsibilities.
- Maintaining insurance for older members. Many superannuation funds’ default covers taper rapidly as members grow older but their insurance needs may not reduce.
- Encouraging members to report to their superannuation funds life events such as having children, taking a home loan and older children becoming financially-independent. This information would assist funds to better align default cover to their members’ circumstances.
- Considering the fundamental redesign of their TPD and income-protection cover to provide a “disability package” that is closely aligned to needs.
What members can do
Members should not assume that their superannuation fund’s default cover is adequate for their circumstances. It almost certainly is not.
The onus is on individual members, perhaps with the guidance of their financial planners, to try to ensure that their insurance cover for life, TPD and income-protection is adequate for their family’s circumstances. The simple insurance calculators published by most superannuation funds can provide a useful starting point.
For both superannuation funds and their members, a key point is just how much insurance needs depend upon family circumstances. This further underlines the importance for funds to know as much as possible about their members.
The persistent problem of underinsurance among fund members presents funds with continuing opportunities through enhanced member engagement, technological innovation and some new thinking about member needs.
The requirements for basic life cover for family members contrast sharply with those without dependants where the immediate insurance needs are minimal. This contrasts with the TPD needs which are similar to those of family members.
Restrictions on meeting needs through default cover
A real challenge in providing members with levels of insurance cover that go a long way to meeting their insurance needs is the requirement that insurance premiums should not unduly reduce members’ retirement incomes. This is not an issue for the members who have established their needs and considered their budget in planning their insurance programme but it is a real issue for designing default cover.