An increasing number of Australians now obtain their primary life insurance cover from their superannuation fund. However, members can forego cover by exercising their right of Member Choice, particularly if they set up an SMSF.

Life Insurance and Superannuation
A generation ago, superannuation was a privilege available mainly to full-time (often senior) employees of the public service or large companies. Most other people bought all their superannuation, investment and life insurance products from agents of life insurance companies. Since then, the distribution of products from the financial services sector has undergone a structural change in behaviour:

• The growth of mandatory employer superannuation has provided superannuation for allemployees except casuals earning less than $450 in any month;
• Many Australians wanting to save now lean towards purchasing investment properties (mainly residential) rather than investing in managed funds; andThe majority of Australians now obtain their primary life insurances from their
  superannuation fund.

These trends mean that most Australians are building the bulk of their financial wealth (excluding their family home) as well as their life insurances within their superannuation fund.

Under-insurance
Most Australians are unaware of the types of life insurance benefits available. They certainly don’t know how much insurance they need and many would not know the levels of protection they have within their superannuation fund or, for employed persons, their entitlements within Workers Compensation. This ignorance leads to a national under-insurance problem.

Most people don’t buy life insurance unless they have a financial plan, although many are provided with ‘default’ cover within their superannuation fund. As most Australians don’t seek a plan until they are close to retirement (if at all), the majority are not covered adequately during the years when they most need cover. The amount of insurance needed varies according to the circumstances of each individual or family.

• Those with high mortgages need to hold enough insurance to cover the outstandingdebt.
• Those with children should carry enough insurance to protect them until they are old enough to work themselves.
• All workers should carry income protection. Ideally this would cover their entire income with benefits payable up to retirement. However, insurers tend to limit cover to a maximum which is typically 75% of income plus an additional 10% to be paid into superannuation, so this maximum level should be obtained if affordable.

As most Australians cannot afford to be fully insured for life insurance, TPD, trauma and income protection, they must compromise. Buying insurance through their superannuation is tax efficient for most members with dependants – and it does not affect their take-home pay.

Life Insurance Default Cover
Workers Compensation (and other schemes such as the Transport Accident Commission (Victoria) and ETU Income Protection Insurance) provide reasonable benefits for those who suffer injury, illness or death as a result of their work, but the majority of deaths and disabilities do not occur from work-related causes. If someone relies on default life insurance within superannuation, they will receive much higher benefits than were provided even five years ago.

Superannaution Funds have been proactive in addressing the systemic under-insurance issue by increasing the default levels of cover. However, in most cases, even today’s enhanced benefits will not cover the full needs of most members. Similarly, someone relying on Workers Compensation will not be protected if they have a death or disability which is not work-related. Consequently, there are limitations in relying on default levels of insurance cover.

An increasing number of Australians now buy life insurance direct, either online, over the telephone or in response to media promotions. This distribution channel is growing strongly as life insurers (and reinsurers) attempt to diversify their distribution. The problem with this is that these consumers do not receive any advice and there is no burden on insurers to ensure consumers are made aware of the range of Insurance options available to them.

There is a large market for retail sales through financial advisers. However, the demand comes mainly from more affluent and high-net-worth (HNW) individuals and families with complex financial arrangements and from the self-employed and small businesses community (including
for Key Person or Shareholder protection). Many average australians find holding direct life insurance policies too much of a financial burden.

Clearly, it is more effective for many middle income Australians to buy their insurance from their superannuation fund, either directly or via their adviser. Meaning that Life Insurance and Superannuation is now a critical issue and one that many Australians wrongly beleive is handled by there Super Fund. 

A key challenge for funds going forward lies in encouraging members to consider their overall insurance needs; if they simply rely on default cover they may well be only partly protected. Currently, only 5% to 10% of active members have voluntary death and/or TPD cover in excess
of the default level. Given that default cover is typically targeted at levels well below the perceived insurance needs of many members, the opportunity to up-sell is considerable. From the insurer’s perspective, the profit margins available on such cover are high, given the marginal
costs involved in underwriting and administration.

Choice of Super Fund
One of the impacts of the introduction of Choice of Fund has been that employers can no longer be certain that all their employees have a basic or default level of insurance cover. Those that exercise Choice and do not arrange appropriate cover in their chosen fund may then have little
or no cover at all which can leave the employer in an invidious position if the employee becomes seriously ill or dies with insufficient assets to support themselves and/or their dependants.

Concessional Contribution Caps
The introduction of concessional contribution caps has reduced the attraction of arranging risk insurance through superannuation. With a cap of $25,000 per annum4 and a package of risk insurance cover for a more mature employee costing say $2,000 to $3,000 per annum, only
$22,000 to $23,000 per annum of concessional contributions would be available to provide for retirement, we expect increasing numbers of
employees to arrange some risk insurance outside superannuation, particularly once they attain age 50.

Self Managed Super
The phenomenal growth of the SMSF sector over recent years is well known. There are now over 425,000 SMSFs with assets of over $420 billion. After excluding retirees, there are about 300,000 members of SMSFs who should have life insurance. However, only 13% of SMSFs
provide insurance cover so this sector could be described as the ‘forgotten’ sector from a life insurance perspective. Some insurers have identified this as a growth opportunity but we have yet to see any significant inroads being made into the SMSF risk insurance market.
Risk insurance established through SMSFs is generally individual (retail) cover which has a greater range of options and should ideally be put in place by Self Managed Super Advisers to ensure the levels of cover are adequate and that the insurances in question are properly structured and set up.