What to consider when recommending insurance in superannuation

RetireInvest's Col Fullagar takes a look at insurance within superannuation and highlights the key aspects to consider.

When making risk insurance recommendations, it is not uncommon for an adviser to state they are not driven by price.

Whether or not this is the case, the fact is that:

• at the time of the initial advice, if the cost of the risk insurance is not acceptable, the client is likely to amend the recommendation in some way or not take it at all; and
• each year as the insurance renews and the premium cost escalates, both clients and advisers will deliberately or inadvertently review and consider the cost/benefit ratio.

Therefore, not only is it important that the most appropriate insurances are put in place but it is also important that these insurances are structured such that price control can be maintained in the future.

A number of price-control tools were discussed in the Money Management article ‘Keeping a handle on premiums’ (October 15, 2009).

Increasingly, however, another common price-control tool being implemented is placing the insurance within superannuation so that tax effective dollars can be used to pay premiums and funds diverted to superannuation can similarly be used to pay premiums in order to reduce the impact of these premiums on the client’s day-to-day cash flow.

The logic and wisdom of the above is sound subject to several provisos, including the quality of the advice not being compromised by the quality of the insurance products utilised in the recommendation, and it is here that the risk to the adviser and the client potentially lies.

Advisers need to ensure they are being provided with sound research data on the insurance policies used within the superannuation environment so that the recommendation they make pays due regard to the cost/benefit equation.

A review of the insurance offering under one superannuation fund may serve to highlight the potential problems if robust research data is not available.

The following analysis is by no means comprehensive as it is only based on the information included in the fund’s online insurance guide dated May 2009.

It is worth noting that the lack of ready access to the actual policy document is a separate but troubling issue.

The name of the particular fund reviewed has not been provided because, to be fair, if a similar analysis was undertaken of other superannuation products, it is the case for some (that have been reviewed) and likely for others (that have not yet been reviewed) that similar, or even more problematic issues might exist.

The issues identified included the following:

• There is no mention of a guarantee of upgrade, therefore, future improvements to the insurance cover will not automatically flow back to existing policies. The issues associated with this are covered in the article ‘Guarantee of upgrade — an adviser’s safety net’, Money Management, November 19, 2009.
• Terminal illness is covered under the total and permanent disability (TPD) benefit rider rather than under the term insurance benefit. Therefore, if TPD is not included or is not available to a client, there is no terminal illness cover in place.
• The definition of terminal illness requires the insured to be diagnosed as ‘will die’ in the next 12 months rather than ‘likely to die’. It is the case that some doctors, and certainly many clients, will be unwilling to concede to the certainty of ‘will die’.
• When increases in cover are triggered by salary increases, the occupation of the insured is reassessed. This is in contrast to indexation increases under standard retail risk insurance, where no such assessment occurs.
• Income protection benefits are only paid for a maximum of two years, potentially leaving insureds with chronic debilitating conditions in an unsatisfactory position in the long term.
• The waiting period under income protection does not start until the insured sees a doctor, who must confirm that ‘total disability’ exists. There are two issues here:
  • an insured suffering a long-term, chronic condition may understand their condition such that they do not immediately rush off to the doctor when they need to take time off work. By doing this, the insured may inadvertently compromise their claim even though the partial, self-management plan is undertaken with their doctor’s full knowledge and blessing; and
  • while a doctor can confirm that, in their opinion, the insured is medically unable to perform certain duties and is also receiving treatment, the doctor cannot confirm that the insured is ‘not working’. Therefore, it is technically not possible for the doctor to confirm that the insured is ‘totally disabled’.
• Income protection premiums are only waived when the insured is receiving disability benefits (i.e, the waiver ends when benefit payments end after two years). If disability continues beyond the two-year benefit period, the insured may not be able to afford premiums, thus jeopardising their ability to keep the policy in force.
• The wording within the income protection offset clause contradicts itself in that it refers to benefits that are ‘received’ and also benefits to which the insured is ‘entitled’ being offset at the time of claim. This type of ambiguity can lead to misunderstanding and disputes, which will not reflect well on the insurer or the adviser.
• Going further, the offset clause provides for an offset of ‘any income that in the opinion of the insurer, you could reasonably be expected to earn in your occupation while disabled’. The discretionary power delivered to the insurer with broad wording such as this, again, may well lead to misunderstandings and disputes at the time of claim.
• Under income protection, a war exclusion is included to the effect that ‘no benefit is payable if a sickness, injury or medical condition is directly or indirectly caused by any act of war (whether declared or not), revolution, invasion, rebellion or civil unrest’. Again, uncertainty can exist for the adviser and insured (and possibly the insurer) as to the interpretation of this clause (e.g, if there was a unauthorised demonstration that turned violent and the insured, as an innocent bystander, was injured, will the exclusion apply by virtue of ‘civil unrest’?).
• The definition of accident (i.e, ‘bodily injury caused solely and directly by accidental, external and visible means independent of any other cause’) is materially different to that generally included within retail risk insurance. What is the impact of these wording differences and, if there is none, why are the differences included?
• The definition of total disability states that the insured must not work in any occupation ‘whether or not for reward’. Therefore, total disability may not apply if the insured returns to their own occupation in order to undertake basic, non-revenue generating duties (e.g, signing some cheques) or if the insured undertakes some non-paying charitable work.

It would be reasonable to theorise that if the above issues were present in retail risk insurance, the risk insurance researchers will severely mark the product down such that advisers will be unlikely to include those insurances in their recommendation.

Yet, for the sake of premium savings and cash flow efficiencies, there appears little hesitation in recommending these insurances under a superannuation umbrella.

Worse still, in the absence of proper research, there must be some doubt as to whether the material differences in cover between the retail and the superannuation offering are being included in the appropriate advice documents such that the client is able to make an informed decision.

No one will deny the importance of providing a client with the information necessary to make an informed decision, including a cost/benefit analysis.

No one will deny the importance of the above in providing risk protection for the adviser and the adviser’s business and yet, when it comes to including risk insurance under superannuation, it seems the necessary analysis is not always being provided.

Is this practicing safe super?

Col Fullagar is national manager for risk insurance at RetireInvest.