Industry super funds manage the majority of Australians’ retirement savings. With low fees and generally good performance, it’s hard to argue for an alternative option for most people.
They also fulfil the insurance needs for many Australians as well. Specifically, they offer Life, Total & Permanent Disability (TPD), and Income Protection cover. For many who haven’t consulted a financial adviser, this might be their only form of personal insurance.
We all know that industry funds provide low-cost super, but what about insurance? How does this compare to adviser distributed coverage?
Cost Comparison
Assumptions
This comparison is based on the following parameters:
- 35-year-old male
- Non-smoker
- White Collar occupation (business analyst or similar)
- $100,000 annual income
With the following levels of coverage:
*Assumed waiting period of 30 days with a benefit period of age 65.
Insurers Compared
Quotes were obtained directly from the quoting tools available on the websites of the following industry funds: AustralianSuper, HostPlus, Australian Retirement Trust, Aware Super, REST, and HESTA. These quotes reflect tailored policies, not default cover.
For comparison, retail insurance products available only through financial advisers were also included, with premiums calculated on both a commission and commission-free basis.
Quotes have not been attributed to specific funds, as the goal of this article is to analyse trends rather than promote particular providers.
Comparison
*Fund #1 only offers to age 67 income protection cover.
*Fund #4 only offers an age 60 income protection benefit.
For about the same level of coverage, the highest cost industry fund cover is over 3 times more expensive than the lowest cost cover.
At $5,560 annually, Fund #1’s premium represents a ridiculous cost for what is moderate coverage, especially for someone with relatively low risk. Such a high premium would consume nearly half of this person’s yearly superannuation contributions.
But why are these costs so varied?
Underwriting Requirements
Industry super funds do not directly provide insurance to their members. Instead, they outsource this service to large retail insurers like TAL, AIA, and MetLife. These same insurers also offer policies through financial advisers, albeit under different product structures.
Each insurer has its own underwriting guidelines, and the policies provided through industry super funds often have less stringent requirements compared to retail adviser-distributed cover. While this makes it easier for members to obtain coverage, it also increases the risk of claims. Higher risks require higher premiums to compensate, which is why industry fund insurance tends to be more expensive.
In contrast, adviser-distributed insurance involves a far more rigorous underwriting process. Those who have gone through the process with a financial adviser will remember the level of detail required in the application. Whilst this is time-consuming, it ensures that the risk is better assessed, allowing retail insurers to offer lower premiums, even when commissions are included.
This detailed underwriting approach is a significant factor in why adviser-distributed insurance is often more cost-effective than the options provided through industry funds.
Inferior Cover
While industry fund insurance is often more expensive, the differences go beyond cost. Many features and options available in adviser-distributed policies are simply not offered by industry funds.
Ability to Pay Income Protection Personally
One of the most critical distinctions is the ability to pay income protection premiums personally. When paid personally, income protection insurance premiums are tax-deductible, reducing the effective cost by 30–45% depending on your marginal tax rate.
Because industry fund insurance must be paid through your super fund, you lose the potential for this tax deduction. This limitation can make industry fund income protection considerably less cost-effective over time.
Own-Occupation TPD
There are two primary types of Total and Permanent Disability (TPD) definitions:
- Any-Occupation TPD: Pays a claim if you are unable to ever work again in any job suited to your education, experience, or training.
- Own-Occupation TPD: Pays a claim if you are unable to continue working in the specific job or occupation you held prior to your disability
Own-occupation TPD is a superior option as it offers greater flexibility and increases the likelihood of a successful claim. However, it cannot be funded through superannuation because an own-occupation disability does not necessarily meet the strict conditions of release required to access superannuation funds. As a result, industry funds are unable to provide this type of coverage.
Retail insurers often provide a split option, allowing a portion of the TPD premium to be paid from super (for any-occupation cover), with the remainder (own-occupation) paid personally. This hybrid structure allows the bulk of premiums to be paid from super with a small amount paid personally to access own-occupation. This structure is unavailable in industry fund insurance.
The lack of this type of cover is a major downside to industry fund insurances.
Trauma Insurance
Trauma insurance provides a lump sum payment upon diagnosis of serious medical conditions such as cancer, stroke, or heart attack. Like own-occupation TPD, it cannot be paid from super due to release restrictions. As a result, industry super funds do not offer trauma insurance to their members.
Other Missing Features
Insurance policies are inherently complex, and even among retail insurers, there are significant differences in terms of features and benefits. Some notable features that are commonly available through retail cover but missing from industry fund insurance include:
- Buy-Back Options: Allowing you to restore cover after a claim.
- Increasing Claims: Ensuring payouts keep pace with inflation.
- Future Insurability: Allowing policy adjustments as your needs change without requiring further medical underwriting.
A deeper dive into the differences will be the subject of a future article.
Summary
Industry super funds provide a great option for most people’s super. However, when it comes to insurance, they may not be as beneficial.
Insurance offered through industry funds is often more expensive and provides a lower-quality product compared to adviser-arranged options. Over the long term, engaging a financial adviser to help you establish tailored insurance cover can be significantly more cost-effective. Additionally, you’ll benefit from superior coverage and specific advice on the amount of cover that is appropriate.
To avoid potential conflicts of interest associated with insurance commissions, consider working with an adviser who operates on a fee-for-service model, ensuring their recommendations are fully aligned with your best interests. You’ll also benefit from around 30% lower premiums with a nil commission adviser.
Links
https://insurancecalculators.tal.com.au/australiansuper
https://www.eapplication.metlife.com.au/eapply/premiumCalculator?s=71b6c390ede7b37e#
https://insurancecalculators.tal.com.au/awaresuper
https://rest.com.au/tools-advice/tools/calculators/tal-calculator
https://lifeapp.groupinsurance.aia.com.au/hesta/getquote.html#fund=HESTA
