How can we stem the decline of life cover in superannuation?

According to recent research from the Association of Superannuation Funds of Australia (ASFA), there's a sharp drop in the number of Australians insured for death benefits and total and permanent disability (TPD) through superannuation.

Good intentions lead to decline

Most super funds offer life and TPD insurance cover to their members, typically provided on an opt-out basis for members up to a specified age. 

Research from the Australian Securities Investment Commission shows that, as of March 2023, approximately 15 million Australians had superannuation accounts, and about 8 million of them had insurance through it.

Almost 71 per cent of those accounts have insurance that is automatically provided by the superannuation trustee.

However, that number was significantly higher prior to legislative changes under the Protecting Your Superannuation Package (PYS) of reforms and the Putting your Members Interest First (PMIF) changes introduced in 2019, which aimed to prevent people paying for something they had not actively signed up for in a fund they were not actively paying into.  

Combined with increased costs in obtaining financial advice and fewer advisers available to assist, what does this decline in protection mean for the financial security of many Australians?

Welfare ramifications on the cards

Mary Delahunty, CEO of ASFA, says the PYS and PMIF which were part of the legislative amendments, have contributed to the decline in cover.

“The PYS and PMIF measures led to a 36 per cent reduction in the number of lives insured through superannuation for death benefits,” she says. “There was a similar decline in the number covered for TPD.

“It created a situation where many Australians were without insurance cover, and a near complete lack of default TPD cover for young people under the age of 25, if they were not employed in dangerous occupations. This may have broader ramifications for the welfare system.”

The PYS package was specifically designed to protect Australians’ superannuation savings from unnecessary erosion by fees and insurance costs.

The legislation included changes to fees, the transfer of inactive low-balance accounts to the Australian Taxation Office, and the cancellation of insurance on inactive super accounts that have not received contributions for at least 16 months.

The PMIF measure, designed to build on the PYS requires all super funds to stop providing insurance to members on an opt-out basis where the member has an account balance below $6,000, or for new members under the age of 25.

Delahunty says the impact of PYS and PMIF has been substantial — and has led to almost 5 million people losing TPD cover, or not having cover when they first joined a superannuation fund.

“TPD insurance provides affordable and cost-effective cover that delivers real benefits for people and their families where their lives are impacted by accident or illness,” she says.

Young Australians go without

The ASFA report also reveals that 5,000 sets of beneficiaries of death benefits missed out on payments of A$665 million in aggregate in 2022-23.

It also shows that without the PYS and PMIF changes, there would have been an additional 11,000 individuals a year receiving around A$1.5 billion in TPD benefits.

Kerry Vogel, Head of Insurance Operations Insignia Financial, says while the measures were intended to protect members' superannuation savings, they also had the side effect of reducing insurance coverage for a significant number of members.

“Younger cohorts are often without insurance coverage for an extended period, and it is often members in this age category that take risks/have workplace accidents and do not have death & TPD cover,” she says.

“In addition, due to superannuation fund rules and insurance policy terms, which requires members to be underwritten if they have previously held default cover, many of these members may never obtain TPD cover again,” says Vogel.

Need for advice 

Access to affordable financial advice is a major barrier to understanding the intricacies of life and TPD insurance.

Delahunty says addressing these barriers may have an impact on the low voluntary take-up and voluntary increases of TPD insurance and coverage in Australia.

“ASFA is convening a dedicated policy working group to further examine the best ways to meet the ongoing insurance needs of all Australians, including young Australians,” she says.

Vogel agrees that the financial barrier is significant. She says it has been impacted by a drop in the number of available ASIC registered, qualified advisers, which currently sits at less than 16,000.

“Insurance in superannuation is complex,” she says. “People need assistance to understand their needs and options because they are planning for what they hope to never need.”

“This has not been helped by the rapid decline in adviser numbers,” adds Vogel. “Between 2021 and 2020, approximately 9,000 financial advisers exited the industry, representing a decline of around 30 per cent in adviser numbers.

"In addition, unfortunately, the current cost of financial advice makes it inaccessible for the majority of Australians.”

Addressing design challenges

Richard Land, Head of Insurance Product at AustralianSuper, points to the fact that insurance in super is funded by deductions from members’ retirement accounts.

He notes that policymakers, trustees and members need to decide on the relative proportions to fund members’ retirement outcomes or to fund insurance cover.

“While an important and valid approach, it may be construed as representing a barrier to obtaining comprehensive cover in super, because the government has rightly prohibited default cover for low balance, young members and members with inactive accounts,” he says.

“In addition, trustees have adopted default insurance designs, which do not inappropriately erode the retirement income of beneficiaries, and many members have not made active decisions to voluntarily increase their insurance cover,” Land observes.

The government role

Land says the Government has a role to play to reducing the current barriers to insurance in superannuation.

“The Government could address barriers to providing more appropriate insurance in super by facilitating access to additional data to assist in more individualised designs,” he says.

The Government’s Delivering Better Financial Outcomes reforms, may assist in lifting this barrier.

"It aims to address the high cost of advice, better protect consumers, bolster ethical standards and ensure Australians can access information that could help to make a meaningful difference to their quality of life in retirement."

The reforms are made up of three streams and include removing onerous red tape that adds to the cost of advice with no benefit to consumers, expanding access to retirement income advice and exploring new channels for advice.

“More affordable and accessible advice will assist super funds to proactively help members bridge gaps in insurance coverage," says Vogel. “We hope the Government’s Delivering Better Financial Outcomes reforms will deliver this.”

“Adequate insurance plays a big part in supporting people’s retirement and reducing the broader financial burden on society," she adds. “It should be considered as part of any government retirement policy.

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