Life Insurance in Super: Costs on the Way Up?

Having insurance through superannuation can be a tax-effective and cost-effective way of protecting yourself and your loved ones. Most funds offer three different types of insurance through super, each covering different contingencies: life insurance, total and permanent disability (TPD) insurance and income protection insurance.

Life cover pays a lump sum or income stream to the insurance holder’s beneficiaries when the holder dies, or if they have a terminal illness. TPD insurance pays a benefit in instances where the holder becomes permanently or seriously disabled and is unlikely to work again. Income protection insurance pays the holder a regular income for a specified period if they can’t work due to temporary disability or illness.

It’s estimated that around 70% of Australians who have life insurance hold it through their super fund. However, the Australian Prudential Regulation Authority (APRA) has noted new and concerning developments that may see the costs of this insurance go up.

According to the data APRA has collected on life insurance claims and dispute statistics, premiums per insured member within super funds escalated during 2019 and 2020. APRA has likened this trend to what occurred between 2012 and 2016 when, after a period of significant premium reductions, insurers experienced significant losses. This led to large premium increases and more restrictive cover terms for insurance holders.

APRA notes that should this trend continue, super members are likely to be adversely affected by further substantial increases in insurance premiums and/or reductions in the value and quality of life insurance in superannuation. The regulator goes as far as saying that the ongoing viability and availability of life insurance through super may be at risk, which will impact a large proportion of the population.

It’s not time to panic just yet, but it’s important for your clients to regularly review what insurance they actually need, what cover they have through their super, and what they’re paying for it, as premiums can add up and erode their super balance – especially if they’re unnecessarily paying them to multiple funds!

Many super funds allow their members you to adjust their insurance cover (either up or down) to suit changes in their situations, with corresponding premiums. And if your clients are not happy with the prices or levels of cover they’re receiving from their fund, they can always consider obtaining insurance outside of super.

For now, APRA is continuing to monitor the situation to ensure that registrable superannuation entity (RSE) licensees take appropriate steps to safeguard pricing, value and benefits for members that adequately reflect the underlying risks and expected experience.

Important: Clients should not act solely on the basis of the material contained here. Items herein are general comments only and do not constitute or convey advice per se. Also, changes in legislation may occur quickly. We, therefore, recommend that our formal advice be sought before acting in any of the areas.