When is enough, enough? The balancing act of personal insurance

There has been a lot of political wrangling since the final choice regulations were released, about whether insurance should be compulsory in Retirement Savings Accounts (RSAs).

Much of the debate has centred around the erosion of already low account balances by insurance premiums as opposed to the potential benefits of having of insurance. Perhaps the more pertinent issue however, is whether insurance is appropriate for the typical RSA member.

It is a fact that the vast majority of RSA members have very low account balances. Either the RSA is an inactive account or it is taking contributions related to a member’s second (or third, etc) job.

In either case, insurance, if required, should form part of the package around the primary source of income and, for these members, it is not necessary to provide insurance in the RSA.

Of course, if insurance is provided, a member can opt out — but we all know that in practice most members in RSAs will simply accept the default. So do we provide insurance, when in the majority of instances it is simply not appropriate, just for the sake of the few where it is appropriate?

In the case of RSAs, the Government has got it right excluding them from the insurance requirements.

In any case, RSAs are not an issue for the bulk of the population. For most super fund members the far more relevant issues are ‘how much and what sort of insurance is enough?’

How much insurance is enough?

It is generally accepted that the majority of Australians are under-insured, if at all. The argument follows that some insurance is better than none. However, that is perhaps not the case if the result is that it encourages a false view of insurance needs.

Many consumers may interpret the regulations to be suggesting that if you are 30 years old, $50,000 is a suitable level of death cover. For most people this level of cover will be inadequate. While the intention is good, the Government may be creating a false sense of adequacy.

Just as many super members mistakenly assume that the 9 per cent compulsory superannuation guarantee (SG) contribution will provide them with sufficient income in retirement, many members will mistakenly assume that the minimum levels of death cover will meet their needs.

Also, there may also be a tendency for employers currently offering more generous insurance levels to replace their offering, at some point in the future, with the cover set out in the regulations. In particular, employers with salary-related cover may find it too complex to ensure they meet the minimum scale. Over time, some will simplify matters for themselves by adopting the scale, resulting in generally lower levels of insurance than at present.

If you doubt this, look at what happened with SG. The employers who were offering more generous superannuation levels have over time largely fallen in line with the legislated 9 per cent level.

What about disability and income protection?

The other issue, of course, is the lack of attention given to disability cover.

While most Australians are under-insured for death cover, even fewer have appropriate levels of disability cover. Most Australians adopt the ‘it won’t happen to me’ mentality and do not bother to insure against the financial impact of disability. This is exacerbated by the complexity of cover and because income protection is less commonly available through superannuation funds.

For younger members, with no dependents, disability insurance can be much more important than death cover. If they are injured they need to support themselves while they are off work; yet if they die, there may be no dependants in need of support.

While I am not advocating the need to mandate disability cover, I am concerned that by mandating death cover only, it encourages the view that disability cover is not needed — when in fact the need is often much greater.

Financial literacy

It has already been demonstrated time and again that there is a poor level of financial literacy among Australians.

Recent research has also shown there is a lack understanding by consumers around insurance — particularly insurance as part of the superannuation package. Consumers clearly don’t have a grasp of what insurance is available, let alone how much they may require.

As always, the battle for super funds is the need to adequately educate their members. We need to help members understand the real need for insurance and the added benefits of insurance when offered through their superannuation fund.

Ken Lockery is head of Strategy at AMP CorporateSuperannuation