A recent article in the Australian attacking insurance cover held inside super seemingly misses the point when it comes to the value of holding insurance. Personally, I think this is a dangerous message to send to people in a country which we know has a gross under-insurance problem (ironically, research also conducted by Rice Warner). If anything, this article should have addressed the dramatic increases in insurance premiums inside industry funds and the comparison to retail insurance premiums to illustrate which actually provide real value to consumers. I have selected some of the key points below which I think warrant a response or some discussion but I encourage you to read the full article.
The Rice Warner report reveals a large discrepancy in the rates that super fund members are charged for life insurance products, and found extreme cases like a 21-year-old in a heavy manual occupation who would lose up to 34 per cent of their account balance over their working life due to the high rates being charged for life insurance cover — equal to missing out on an extra $600,000 at retirement.
On face value these figures seem quite concerning but sadly the Australian doesn’t show their calculations, reference the Rice Warner report or provide a table of explanatory figures. This is a problem since the Rice Warner post on these figures seems to come to some different conclusions. In the infographic they produced, they show that an average 21 year old with no insurance will have a retirement balance of $1,783,272 at age 65, compared to a comparable individual who held default insurance cover would result in a retirement balance of $1,607,270 or $1,518,122 for white collar or blue collar insurance cover respectively. It seems to me like the data used to calculate the figures shown in the Australian are the worst case possible or at least based on significantly different assumptions than the Rice Warner results.
A young white-collar worker was projected to have 21 per cent less at retirement when charged for death, total and permanent disability (TPD) and income protection, compared to a saver who was not charged for any insurance cover.
Again, based on Rice Warner’s own public post on this issue, the “21 percent less” quoted is grossly misleading. But the principle holds, if you pay for insurance using your superannuation savings, your long term retirement savings will be impacted. The question of whether the trade off is valuable is something that each individual needs to assess based on their needs and personal circumstances. Perhaps what is of more concern are young people who are paying for insurances which are unnecessary or not suitable for their needs and, as is often the case, they are unaware that these costs are being incurred by their superannuation fund on their behalf. I still think there is a way to inform and educate people on what their superannuation trustee does on their behalf without scaring people off the idea of insurances and without diminishing the value that insurance provides to an individuals financial situation.
Many people forget that a 21 year old who has no insurance and is totally and permanently disabled becomes financially dependent on their family or the state. Insurance is a means to mitigating this risk and providing some financial security to the life insured. Even if funding insurance cover over a lifetime cost $600,000 in retirement savings, is that cost not worthwhile to ensure that you actually make it through to retirement?
“If someone is going to contribute 2 per cent of their salary to life insurance, then there’s not much savings left when you take out investment fees, premiums and taxes,” Mr Rice said. “It’s got to be about finding the right balance. I don’t think the funds have thought about value for members in insurance.”
While it is a concern when superannuation funds are neglected and not actively contributed to, for someone maintaining one super account that holds insurance on their behalf (even if that cost is 2% of their annual salary) and actively contributing to that account, there is at least 5% of annual savings* on the account – not considering any investment growth. Of course, value of insurance cover is important and I think more people should take an active role in monitoring and maintaining their superannuation savings as well as their personal financial planning generally. But the default rules for those who do not take that active role is not inherently bad and I know that the Rice Warner report is more targeted at trustees and what they can do to more prudently manage their members funds.
* Assuming 9.5% contribution rate, less 15% contributions tax, less 2% for insurance premiums and 1.075% in other management costs.