Reality Check on Super Underinsurance

Researcher Rice Warner has ‘told it like it is’ when it comes to the significant average level of underinsurance applying to most superannuation fund members.

In a release last week, the researcher addressed the challenges associated with average life cover levels under super.

Taking a typical superannuation member scenario, Rice Warner suggested a couple aged 40 with children ‘…need life insurance cover equivalent to about ten years of income for the higher-earning partner simply to repay debts and maintain current living standards following a partner’s death.’

For the family to fully maintain their living standard, however, the researcher said life insurance cover of more than 15 years of income for the higher-earning partner is needed. In a similar context it said TPD cover equivalent to 14 to 15 years of income is required.

Rice Warner considers that perhaps the biggest challenge for superannuation funds in providing ‘appropriate and adequate life, TPD and income-protection cover’ is that the insurance needs of members vary significantly depending upon the composition of their families. It said this issue could be addressed by differentiating members’ default cover by marital status and number of dependent children, as well as by age.

…the typical default cover under super meets only about 30% of the basic life insurance needs for families with children

“Ideally, fund data bases should record the family characteristics of their members,” said the researcher, adding that the typical default cover under super meets only about 30% of the basic life insurance needs for families with children.

Outlining how super funds can address what Rice Warner sees as the significant and persistent superannuation underinsurance gap, the researcher said steps could include:

• Differentiating members’ default cover by marital status and the number of independent children instead of merely age
• Tailoring insurance cover for younger people to reduce the possibility of over-insurance given their typically more limited liabilities and responsibilities
• Maintaining insurance for older members. Many superannuation funds’ default covers taper rapidly as members grow older but their insurance needs may not reduce.
• Encouraging members to report to their superannuation funds life events such as having children, taking a home loan and older children becoming financially-independent. This information would assist funds to better align default cover to their members’ circumstances.
• Considering the fundamental redesign of their TPD and income-protection cover to provide a “disability package” that is closely aligned to needs

…members should not assume that their superannuation fund’s default cover is adequate for their circumstances

Rice Warner ultimately places the onus of appropriate life cover levels on the fund members themselves. It says members should not assume that their superannuation fund’s default cover is adequate for their circumstances. ‘It almost certainly is not,’ remarks the researcher.

Instead, it says the onus is on individual members, ‘…perhaps with the guidance of their financial planners, to try to ensure that their insurance cover for life, TPD and income-protection is adequate for their family’s circumstances.’

For both superannuation funds and their members, a key point is just how much insurance needs depend upon family circumstances. This further underlines the importance for funds to know as much as possible about their members.

Giving further context to the issue, Rice Warner noted this is a critical question given that superannuation funds provide about three-quarters of life insurance cover in terms of policy numbers and the high level of underinsurance in Australia.