Cost effective insurance cover

Since the introduction of superannuation choice, there has been a greater focus on finding the best funds for clients. Most of the focus has been on performance and costs. However, one important area, risk insurance, is being overlooked.

Association of Financial Advisers (AFA) national president Michael Murphy says advisers must remember that any move between funds is going to create a gap for cover that could last up to 60 days.

“You do not do a transfer of a super fund without the appropriate insurance being in place,” he says. “At my firm, we check every employee has adequate life cover at all times.”

Coping in an emergency

Advisers are not the only ones to blame for the lack of risk insurance linked to super schemes.

Tower Australia recently researched six consumer segments — young singles, young couples, young families, established families, mature singles and empty nesters — on their attitude to coping in an emergency. Not one of these segments listed risk insurance or superannuation as a coping mechanism if they suffered ill health.

This is a worrying attitude as the financial services industry has assumed people don’t buy risk insurance because they believe they are adequately covered by superannuation.

The Tower research also found that young singles, families and established families believe private health insurance will cover all medical emergencies.

Other broad findings from the survey were that people could fall back on ‘savings’ when in fact they had little or no savings other than the equity in their home. And many others felt their families would help them out.

Industry fund insurance

Industry Fund Financial Planning head of practice Frank Gayton says advisers should look at industry funds if the client is cost-conscious.

“It makes a lot of sense to put someone into an industry fund if cost is a major factor when taking out risk cover.”

Gayton says death and term and permanent disability (TPD) cover with the Australian Retirement Fund starts at $550,000 and can be increased to $2 million subject to the usual medical checks.

“We are also very positive about JUST Super’s risk insurance as they have level premiums to the age of 55,” he says.

JUST Super trustee Gerald Noonan says members can apply for more cover, although if they do it will have to be underwritten.

“Because our insurance is a group scheme, it cannot give exclusions as stand-alone products can,” he says.

Noonan says the fund is in the process of reviewing possible increases in coverage for younger members.

Life insurance in JUST Super starts at a minimum cover of $80,000, which is provided up to the age of 55 and then it scales down over that age.

Gayton says a blue collar worker in the ARF scheme could pay as little as $1.95 a week for $100,000 life cover.

Choice of benefits

However, it is too early to see if there has been a rush to move clients to industry superannuation funds for the low-cost risk insurance benefits.

The Catholic Superannuation and Retirement Fund (CSRF) general manager Greg Cantor says his fund offers death, TPD and temporary salary cover on a group basis.

“At this stage, we don’t know if people are joining the fund just to get the risk cover,” he says.

“However, we are not losing members since choice came in.”

CSRF offers minimum life cover of $100,000, although this drops as members head towards 65.

“The majority of our members are between 30 and 55 so they have the minimum cover,” Cantor says.

Recently CSRF switched from AMP to ING for the group insurance.

“This has generated savings of 9 per cent and the trustees have decided it would be better to increase the benefits rather than cut the fees,” he says.

Cantor says the new benefits come into effect on July 1, which is when the fund will launch its public offer.

Corporate cover

Murphy says a lot of corporate funds also offer an affordable level of insurance, but it is up to the adviser to recommend how much cover should be obtained.

“We work on people having five times salary because if they have a $500,000 mortgage and three kids at school we would recommend $1.5 million of cover,” he says.

Gayton says with higher levels of cover, reasonable benefit limits (RBLs) can be a problem if there is a claim and advisers need to be aware of this.

“But in most cases, it would be hard to exceed the RBL and there is super splitting to alleviate the problem,” he says.

“Another attraction of insurance linked to a fund is where clients have an existing condition that is being refused by stand-alone insurance; often the industry fund will accept the person without a medical.”

ING manager technical services Andrew Lowe says the current RBL maximum is $1.3 million.

“The only people who shouldn’t have risk cover in super are those clients close to the $1.3 million RBL limit,” he says.

Lowe says while superannuation-linked risk cover is very attractive, the minimum benefit levels are often very low.

“If you look at what the Government has legislated under the freedom of choice legislation, the minimum cover is set very low at $50,000 in an employer defined fund,” he says.

Premium payments

Another advantage of taking risk cover through a superannuation fund is cash flow.

“The client can pay the premium from contributions to the fund so they never have to dig into their pockets. However, it does mean a reduction in benefits long-term,” Lowe says.

“If they pay life premiums through superannuation there is also a tax deduction.”

Tower Australia chief executive officer retail life David Callander admits complex life cover requirements cannot usually be handled by a superannuation fund.

“The adviser needs to do a proper assessment and all the client’s needs have to be balanced against what is offered by the fund and there may be a case for a separate policy,” he says.

Callander says there is not enough thought given to life insurance or income protection when rolling over super.

“Planners need to give advice on overall cover for a client,” he says.

“It is about wealth protection.”

Tower Australia chief executive officer group risk & alliances Geoff Black says unfortunately planners concentrate on the superannuation fund and ignore the risk element.

“It seems planners are more concerned about superannuation contributions, rather than the day-to-day economics of adding risk cover,” he says.

“Yes, the risk cover will reduce the amount invested, but the actual amount of reduction depends on the level of cover and needs to be covered by the planner.”

Rolling over benefits

Callander says another area of concern when rolling over client’s superannuation monies is the time between funds.

“The in-between protection when moving somebody out of one superannuation fund into another has to be looked at as the client is in limbo land,” he says.

“They may need a stand-alone cover in future that will need a medical, or financial details checked during this period.

“The client may have been fit at 25, but at 40 they have heart problems and more expensive treatments so the adviser needs a strategy to deal with this.”

MetLife Insurance general manager distribution Richard Collis also agrees this area of cover is often forgotten by advisers.

“One thing the advisers need to be mindful of is when clients change employers they will be leaving the employers’ risk scheme,” he says.

“Few employers allow the coverage to continue once the employee has left, so the adviser needs to arrange cover for the period until they join a new scheme.”

Another area of superannuation rollovers that is being overlooked by advisers and accountants is the creation of a self-managed superannuation fund (SMSF).

“The reality is that when an adviser sets up the SMSF they forget the risk cover,” he says.

“It is all very good to have portable super but if you haven’t looked at the appropriate risk cover, then the adviser is not doing their job.

“And the advisers are missing a big part of the client’s financial well-being.”

Income protection

While life and TPD cover have an accepted home in a superannuation fund, income protection has always been seen as a separate insurance due to the tax treatment.

A number of superannuation funds are offering income protection (or salary continuance) cover within the fund.

Noonan says in JUST Super there is no default limit for salary continuance, but it is possible to get up to 75 per cent of income covered.

“It costs $2 a unit and each unit is for 30 days of salary continuance,” he says.

“So you could have $495 per month for $2 a week, but the older the member is the harder it becomes to get insurance.”

According to Gayton, salary continuance is being offered by many industry funds for up to two years.

“HESTA has salary continuation with a level premium up to the age of 65,” he says.

“This means someone who gets $7,300 of salary continuance a month will only pay about $1,000 a year and the premium never increases.”

Lowe says while he is seeing more salary protection offered in superannuation, the benefits are usually limited to two years.

“The cost of cheaper insurance has to be weighted up against the benefits if something happens,” he says.

“The adviser needs to check the flexibility of the cover.”

Collis also argues that advisers need to be careful when relying only on a superannuation fund’s cover for the client’s income protection.

“There may be a two-month gap between jobs and you can’t rely on the employer super to cover the period of unemployment,” he says.

Murphy believes income protection should be a stand-alone policy because of the limitations of using insurance for this area from superannuation funds.

“We don’t include salary continuance in superannuation, but should people take this cover in a fund, then the waiting period should be covered in a stand-alone product,” he says.

Claims management

But while there are many arguments in favour of using insurance in a superannuation fund, dealing with claims is not easy according to Genesys Wealth Advisers risk manager Col Fullagar.

“If there is a problem with a claim it takes time to sort out as you are not dealing with the decision-maker. You are dealing with an administrator and trustees,” he says.

Fullagar says when the administrator suddenly changes, all the issues are then handballed around the fund.

“Claims are problems depending on the level of complexity,” he says.

“There are different levels to get through before you reach the decision-maker.”

Callander admits risk insurance processes are complicated.

“It is not helped as a lot of advisers now come from an investment background rather than risk,” he says.

“And the process of getting life cover is getting more complex than we would like.”

Raising awareness

Callander says Tower is giving real life examples of what can happen in risk insurance to increase awareness among advisers.

“We are trying to win the minds of the planners to sell more risk insurance through educational campaigns,” he says.

“The success of risk cover is a fundamental when looking at rolling over superannuation.”

Black says Tower is also simplifying the application process and the underwriting.

“Life insurance has been a long, drawn-out process taking between 30 to 90 days to issue a policy,” he says.

“We have made application forms simpler and looked at our administration systems.

“Tower can now give cover in less than 48 hours, although if the client needs a medical it will take longer.”

Murphy says selling risk is an opportunity for the adviser, especially when they are looking at their super options.

“It is mandatory to ensure the client’s existing insurer is acceptable and they are satisfied with the arrangements,” he says.

“If the client is not happy, then it is an opportunity for the adviser.

“The biggest problem for the adviser is that people are not opting for cover due to the expense and not understanding the benefits of insurance in a crisis.”