Dangers of Group Insurance

At Salt Financial Group we come across Australians every week whose insurance coverage is limited to default Superannuation cover. We have decided to share this article, published in the Age recently, which highlights some of the dangers of default insurance in superannuation.

"Government-required insurance sounded so good. But not for apathetic Aussies"

Through Salt Financial Group you can take out ‘Retail’ insurance policies for Life, TPD and Income Protection and have the premiums paid for through your superannuation (Trauma premiums cannot be paid through superannuation). There are advantages to this.

‘Group’ insurance, however, is cover that you do not specifically request to purchase, there is no needs analysis done and no customisation applied and so is most likely not suitable.

Below are three main takeaways of our thoughts on the dangers of default insurance in superannuation:

1. IT IS EXPENSIVE

Group insurance is underwritten without the insurer collecting information about the life insured. Premiums from the group pool are required to sustain claim payments, operational costs and profits for the whole group pool. In this pool are life insureds that are smokers, are heavily obese and have family histories of cancer, which all have a higher likelihood for a claim. The premiums are averaged across the pool so the obese smoker with a cancer history pays the same as a healthy non-smoker with no family history. This is great for some but terrible for most.

2. THE SUM INSURED AMOUNTS ARE NOT ADEQUATE

The sum insured amounts in industry funds starts off inadequate, in most cases, and typically reduce with age.

The most common cover type through default group policies is Life insurance. It is widely thought that your life insurance sum should be enough to cover your outstanding liabilities and provide an ongoing income stream for your family if you were to pass before your planned retirement.  

• The average new home loan in Melbourne in $384,000 (source).
• The default life cover for some of the top group funds for a 29yr old are: Hesta-$170,000, Care Super-$200,560, HostPlus-$113,092.
• If you had default cover in one of these top industry funds your family could not cover an average mortgage let alone provide any type of ongoing income.

3. THE DEFINITIONS ARE RESTRICTIVE

You are unable to take out an ‘Own’ occupation definition on a TPD policy in superannuation. This means that you would need to be unable to return to work in any occupation reasonably suited to you by education, training and experience. Insurers can look at a wide range of occupations when deciding whether you are likely to ever work again, some of which may bear little resemblance to your own occupation.

With income protection, many default insurance products only have a benefit period of 2 or 5 years. This is suitable if you plan to retire in 2-5 years but if not, you are not sufficiently protected in this space.

If you only have group insurance, don’t know what insurance you do have, or have not had your insurance reviewed recently speak to us about a need analysis and insurance strategy. This advice service is at no costs to ours clients.