Laying down a level playing field

The Shadow Minister for Financial Services, Superannuation and Corporate Law, Chris Pearce, recently called on the Government to offer critical illness insurance premium tax deductibility within superannuation.

In his speech at the Investment and Financial Services Association (IFSA) Lifewise launch on May 1, 2009, Pearce admitted “there is currently an inadequate take-up of trauma insurance and, in addition, there is a worrying level of apathy surrounding trauma underinsurance”.

“Superannuation offers a unique vehicle for providing essential insurance cover for all Australians. It gives most Australians access to insurance at competitive prices, often without needing to be underwritten.”

The time has come to provide a level playing field for critical illness (also known as trauma) insurance and allow more Australians to protect themselves financially from diseases such as cancer, which is the most common critical illness in Australia.

Total and permanent disability (TPD) and life cover are afforded tax deductions when held within super under the current regime. The proposed change would allow for critical illness to be treated in the same way, receiving a tax deduction on the premium, providing a significant financial incentive for Australians to take out this vital cover.

Given the underinsurance crisis we face in Australia, any idea that makes it more attractive for Australians to protect themselves by taking out insurance is worthy of consideration.

The key here is that critical illness insurance provides a lump sum to the life insured, which allows them to pay for treatment, retire debt or, more broadly, focus on fighting their ailment rather than worrying about their finances.

If the life insured recovers, they can then rejoin the workforce. This offers a neat fit, as critical illness cover available within the super environment could see the life insured continue to accumulate funds to retirement.

There is a strong case for the Federal Government to consider amending the superannuation conditions of release to facilitate the use and equal treatment of critical illness in super.

In fact, by not having this cover within super, the Government may find that it receives applications for early release of superannuation monies in order for Australians to fund their treatment strategies.

There are two main reasons why the proposal for equal tax treatment for critical illness in super should be considered.

1. Underinsurance is a critical issue for many Australians

As we hear so often, Australia is in the midst of an underinsurance crisis.

According to IFSA, which has impressively corralled industry support for a national insurance awareness raising campaign, 51 per cent of Australians are underinsured by $100,000 or more, leaving them exposed to the risk of severe financial hardship in the event of death, injury or illness.

The Australian Institute of Health and Welfare (AIHW) reports that the average Australian has a one-in-six chance of being diagnosed with cancer by age 65.

In addition, it states that the incidence of cancer is set to increase by around 30 per cent every 10 years, until population ageing peaks around the middle of the century. Death from cancer is also increasing as Australia ages as a nation.

This bears significant financial impacts on individuals and the nation more generally as increasing numbers of Australians require care.

As an example, when critical illness strikes the key income earner of a family, the related medical, rehabilitation and home modification costs can conceivably exceed $100,000. Difficult to cover using ‘rainy day’ savings.

As further demonstration of the magnitude of this issue, in 2008 MLC paid around $50 million in critical illness claims. Of these claims, around 70 per cent related to some form of cancer. Heart conditions accounted for 20 per cent and more than 80 per cent of critical illness claims were paid to a client who was under the age of 60.

The recession in Australia will only exacerbate this issue. As people lose their jobs, income and, in some cases, their investments, the likelihood of families being unable to finance unforeseen medical expenses or even insurance premiums will increase.

Alongside the retirement savings gap, underinsurance is one of the most critical issues impacting Australians.

2. Superannuation and tax benefits for insurance

Superannuation is currently a widely used tax effective solution for the accumulation and protection of Australians’ wealth.

There has been considerable effort by the Government in recent years to make superannuation a more viable and compelling solution for Australians to grow and protect their wealth.

As a result, there was a 22 per cent increase in customers taking out insurance in super over the past 12 months, prompted by the transfer of cover from outside to inside super. The main benefits for members are tax concessions on premiums in the short term and increased cash flow in the long term.

We are seeing increasing numbers of clients taking out insurance for life, TPD and income protection within the superannuation environment.

The need for long-term insurance

We invest considerable effort in educating advisers and clients on the benefits of level premium to aid affordability of insurance cover for the long term, that is, for when people need it most.

Clients are encouraged to adopt insurance while they are younger, particularly as critical illness impacts people at a younger age than most expect. By taking out insurance cover on a level premium basis, clients lock in a lower price for the long term and avoid expensive stepped cover when they are older and most in need of insurance cover.

Since March 2007, we have experienced extraordinary growth in clients choosing level premiums as an affordable solution for the long term.

Advice is the key when it comes to insurance. By structuring a client’s affairs correctly, taking into account the right levels of cover, the mix inside and outside of super and the right premium structure, a client can save many tens of thousands of dollars over the life of their policy.

We have long advocated for insurance inside superannuation to enable more Australians to purchase vital cover at a lower cost.

As the challenges of the recession take hold and the diagnosis of cancer in the Australian population continues to rise, the need for insurance and its role in protecting Australians against the early release of their superannuation ‘nest egg’ is enormous.

Education campaigns by IFSA and insurers can only do so much. As an industry, we need to work with the Government to help shape supportive policy to protect and provide for more Australians.

Sean McCormack is head of product at MLC Insurance.