A Rice Warner study into the affordability of group insurance in superannuation has demonstrated the impact of insurance premiums on the final retirement balance of the average Australian.
The report projected how much a 21-year-old worker would retire with at age 65 if they had life, total permanent disability (TPD) and income protection insurance automatically applied to their super.
At the highest premiums, a blue collar worker could be up to 34 per cent worse off upon retirement age, or around $600,000 short compared to a blue collar worker without insurance in their super.
For white-collar workers (who typically pay lower premiums) the difference was up to 21 per cent, or $382,000 less super than if they had gone without insurance.
— Rice Warner (@RiceWarner) December 15, 2016
A lot of this difference comes down to the compounding nature of investment returns, since “every dollar spent on insurance is one less dollar that can be invested in retirement” as Rice Warner put it.
The fact that there’s been an average premium rise of 215 per cent for death and TPD cover and 82 per cent for income protection over the last four years means the impact of insurance on a super balance is greater than ever.
Of course, insurance doesn’t cost the same for everyone, with Rice Warner finding a wide range in the price of weekly premiums charged from super.
|Default cover weekly premium range|
|Benefit||Age next birthday||White Collar $|
|Death & TPD||30||2.31-8.58|
Source: Rice Warner
|Default cover weekly premium range|
|Benefit||Age next birthday||Heavy Manual $|
|Death & TPD||30||2.38-10.95|
Source: Rice Warner
But with only average premiums charged, the impact of insurance on a worker’s nest egg can still be significant.
|What an average 21 year old will have for retirement at age 65|
|Death TPD & SCI Insurance (White collar)||$1,607,270|
|Death TPD & SCI Insurance (Heavy manual)||$1,518,122|
Source: Rice Warner. Retirement balances expressed in future dollars
The average 21 year old heavy manual worker would have $265,000 less (15% less) by the time he or she retires by having insurance within their super fund.
An average 21 year old white collar worker would have $176,000 less (10% less) by the time he or she retires.
But Rice Warner also modelled the effect of removing insurance from super at the earlier and latter stages of working life.
“A 21-year-old in a heavy manual occupation with death, TPD and IP insurance could have an additional $200,000 in their account at retirement if insurance cover was restricted to ages 26 to 55,” the analysis said.
So should insurance in super be opt-in instead of opt-out?
Insurance within super operates on an “opt-out” system, whereby default insurance is automatically applied on new super accounts.
Super members can “opt-out” of the insurance at any time by taking the initiative to tell their fund provider to cancel or amend their coverage.
Under this default “opt-out” system, it is likely that many Australian workers, particularly young casual employees, are unaware they are being charged for insurance out of their super.
On average, one in four super accounts with insurance sit idle, with no contributions for at least a year, according to Rice Warner.
Despite these findings, Rice Warner said it supports the continuation of default death and disability insurance within superannuation product design.
“For some members, the inability to work occurs due to illness, injury or death, all of which can occur at any time. If this happens before a member has accumulated a reasonable superannuation benefit, it is unlikely that the member’s superannuation balance(s) will make a meaningful contribution to meeting the family’s income needs,” the report said.
“However, a balance needs to be made between providing a sufficient level of insured benefit and the impact insurance premiums will have on retirement benefits.”
“Default cover is a safety net and should remain opt-out”
Rice Warner’s report was released amid a parliamentary committee inquiry into Australia’s life insurance sector.
Opt-out insurance within super has become a key part of that inquiry, following broad criticism of both the insurance and super sectors in recent months.
Life Insurers AIA Australia and BT Financial Group as well as law firm Berrill & Watson have all made submissions to this inquiry saying that offering life insurance to super members on an optional basis would exacerbate Australia’s underinsurance problem.
In AIA’s submission, they argued that moving from an opt-out to an opt-in system might result in a drop from 90 per cent of insured individuals to 18 per cent, and more than 13 million fund members could be left without protection.
“Default cover is a safety net and should remain opt-out. The deeply embedded relationship of insurance within superannuation means that the issue of underinsurance in Australia is now one of adequacy of cover, not whether individuals hold cover,” AIA Australia’s submission said.
“Careful consideration is necessary as reform could inadvertently exacerbate underinsurance issues, leaving many without protection.”
AIA also pointed out that individuals without any cover are more likely to be reliant on social security and welfare, increasing the cost to government.
“Group insurance reduces the social security cost to government by at least $403 million annually,” AIA said.
“It would be a mistake to propose people under 30 do not need life cover. Young people do need cover – but they may need relatively more TPD and/or Income Protection, and proportionately less life cover.
“Many superannuation funds and insurers are moving to address this mismatch by considering and implementing measures to better tailor cover based on life stages and associated needs.”