Innovation needed to close underinsurance gap
Superannuation funds should consider steps to improve the adequacy and appropriateness of their insurance cover as there is a critical gap between the level of insurance needed and the insurance cover in place, according to Rice Warner.
An analysis by the research house found the median default cover of superannuation met only about half of the basic death cover needs for households with no children and a much lower proportion for families with children.
"Superannuation funds have an obligation not to allow the costs of insurance to unreasonably erode members' retirement incomes. This requires trustees to carefully take account of insurance costs when considering the degree to which members' insurance needs are met," it said.
"Nevertheless, the persistent underinsurance of fund members presents continuing opportunities for technological innovation, enhanced member engagement, some creative thinking and further investment by funds."
Rice Warner said the median level of life cover met only 61 per cent of basic needs, 37 per cent of the income replacement level, and the median levels of total and permanent disability (TPD) cover and income-protection covet met only 13 per cent and 16 per cent of their respective needs.
Rice Warner said steps super funds could take to improve their cover were:
- Differentiating members' default cover by marital status and the number of independent children instead of merely age;
- Tailoring default cover at younger ages to reduce the possibility of over-providing life cover given that younger members generally have more limited liabilities and responsibilities;
- Maintaining a balance between cover at older ages and the erosion of balances;
- Encouraging members to report life events ¬and whether they have dependent children; and
- Reconsidering the fundamental redesign of their TPD and income-protection cover to provide a "disability package" that is closely aligned to needs.
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