Need to know
- Many super funds are raising the premiums for the life insurance they offer.
- People often receive life insurance automatically.
- Super funds have been reluctant to communicate clearly on how much these insurance premium rises will cost you.
Life insurance isn't much fun to think about, but it can offer valuable peace of mind and help look after your family if something goes horribly wrong for you.
Most people automatically receive life insurance cover from their super fund. You usually then have the option of paying more for a higher level of cover, reducing your level of cover or cancelling it altogether.
Around a quarter of people surveyed didn't even know they were paying for life insurance
Life insurance in super is a massive industry, worth around $9 billion. An estimated 12 million Australians have cover from their super fund, yet many are very confused about this cover. They don't know what they're covered for or how much they're paying. Around a quarter of people surveyed didn't even know they were paying for life insurance.
You could well be paying your super fund for cover that's poor value or completely unsuited to your needs and, in many cases, can't be claimed on.
Considering how confused people are, super funds should communicate clearly to you about your cover and how much you'll be paying for it. But looking at their recent efforts to let members know that insurance premiums are rising, many funds have fallen well short of this standard.
Most super funds are raising their insurance premiums for the new financial year in response to the new Protecting Your Superannuation legislation. Your fund should have sent you a letter (or email) outlining the changes.
If you haven't heard from your super fund or you're unclear on what's happening to your insurance, get in touch with them. It's your money after all.
This is what many people want to know but funds have been reluctant to make clear.
Ideally, your fund would give you a straightforward notice of the new cost of your life insurance after the changes. This means naming the dollar amount you will pay. This doesn't mean offering a vague estimate or directing you to a multi-page table to calculate it for yourself.
"The easier it is for people to access and understand relevant information, the better," says Professor Carsten Murawski, an expert in financial decision-making at the University of Melbourne.
"It does appear to me that a dollar figure showing the impact per annum, for example, of increased premiums would be a better way than asking people to go to a website, let alone working through some complex table or calculator.
"We want to reduce effort and make it more likely that people understand."
People will not be well equipped to make the types of decisions these notices requireThe Financial Rights Legal Centre
The Financial Rights Legal Centre has also voiced its concerns about the communications coming from super funds on this issue.
"People will not be well equipped to make the types of decisions these notices require," the centre wrote. It was also worried that "the information supplied by the fund may be minimal to avoid the costs of a more tailored approach."
Given that your fund will have to calculate the new fees and premiums it will charge you after 1 July, why hasn't it already done this and told you the new number?
We contacted a number of the funds that were raising premiums for comment on this issue but none were keen to speak on the record.
Dr Martin Fahy, CEO of industry body Association of Superannuation Funds Australia (ASFA), says the Protecting Your Super changes were introduced "for very good reasons". But he says the speed of change had presented problems for the industry.
"It's been challenging for superannuation funds to engage their members with the impact of the changes in just a few short months," he says.
Consumers left to work it out for themselves
"Once again, some sections of the super industry have shown little interest in being transparent or making things easy for their members," says Xavier O'Halloran, director of Super Consumers Australia at CHOICE.
"If I was to walk in to any shop in Australia and was handed a spreadsheet and a calculator to figure out the price of the products, I'd go running for the nearest exit. The fact that super funds are comfortable with this terrible level of customer service says volumes about what they think of consumers."
Some of the letters that we saw from super funds to members were heavy on vague waffle about keeping costs low, and light on actual details of how much the increases will cost you.
The fact that super funds are comfortable with this terrible level of customer service says volumes about what they think of consumersXavier O'Halloran, director of Super Consumers Australia at CHOICE
Here are some of the issues with what funds are telling their members:
- Some funds have referred their members to lengthy, headache-inducing tables of new premiums. This means you'd have to look up your age and calculate the new cost of each of the components of insurance cover you have. Often, you need to calculate this per unit of cover.
- Some letters just outlined the maximum possible increases for each insurance type, including a whopping potential price hike of 48.4% for income protection. Again, there was no personalised communication about what that member would be paying after the premiums go up.
- Other communications have tables for members to calculate how much they would now be paying for each different component of insurance per $1000 of cover.
- Other funds have given a specific dollar figure of how much premiums will be going up, but this is only correct for members who have a standard level of cover and haven't changed their cover since joining the fund.
Confused yet? So are many of the people we've spoken to.
At CHOICE, we've previously recommended that the industry tests its communications about insurance within super with members. This would help ensure people actually understand what is happening to their life insurance. But this testing has yet to become common practice.
As Murawski says, too many Australians are confused by the super sector and are completely disengaged from their super savings.
"The question is: how do we get people to engage with these issues in the first place?," he says. "How do we get people to think about their life insurance in super? That's a big question."
Many super funds have admitted they need to do better in terms of communicating with members. On 1 July 2018, the Insurance in Superannuation Voluntary Code of Practice came into effect. This code didn't go so far as requiring funds to tell people how much they're paying for life insurance, but did see the industry make some attempt to speak more clearly to their members on the issue of life insurance within super.
It's not like the super funds have never been told they need to offer clearer information. Earlier this year, the industry regulator, ASIC, called on them to "provide helpful and balanced communications to their members" around the Protecting Your Super package changes.
They were also told to do better last year and the year before that.
Judging by what we've seen with some of the muddled letters on rising premiums, super funds haven't exactly taken these warnings on board and changed their ways.
The premiums are being raised in response to a suite of government reforms, called Protecting Your Super, which apply from July this year.
These new laws set a cap on the administration fees super funds can charge low-balance accounts and ban exit fees. They also mean that inactive accounts will be shut down unless the members that hold them take action, such as letting their fund know they want to keep it or adding some money.
Without the money they make from these accounts, funds say they have to charge the remaining members slightly more for insurance. The Australian Prudential Regulation Authority (APRA), the other relevant government regulator of the super industry, recently reminded funds that they can only raise premiums in a way that is in line with their legal duty to act in the best interests of fund members.
Super Consumers Australia at CHOICE support the Protecting Your Super reforms because they help tackle the problem of duplicate accounts and people wasting money on unnecessary life insurance. Despite premiums rising, some Australians will actually pay less overall for life insurance in super, because they'll now have fewer super accounts charging fees and insurance premiums.
It is important, however, to be clear on how the changes impact you.
"Ultimately, what we want is to see people with an adequate level of cover at the lowest cost," Murawski says.
To get anywhere near this ideal, funds need to communicate much better with Australians to ensure they get the most out of their super system.
For some people, life insurance in super can be a relatively cheap and easy way to get protection that meets their needs. Generally, you can get this cover without going through medical tests.
Occasionally, people want to hang on to an inactive account to keep the life insurance that comes with it. Sometimes, however, the cover itself is of little use.
The key point is to make an informed choice about the insurance you're paying for in your super.
Unwanted life insurance can eat away at your super
You want to avoid paying for cover from multiple super funds, especially as you often can't claim on more than one policy. The cost of insurance you don't need can seriously erode your superannuation. The 2018 Productivity Commission Inquiry found Australians were wasting $1.9 billion each year on duplicate life insurance policies in super.
For young people who don't have dependents, death cover can be a complete waste of money
We were previously contacted by CHOICE member Diana who was disgusted to find her two young daughters were having their super accounts steadily whittled away by the costs of life insurance they didn't want. The girls didn't even know they had this cover and neither had nominated a beneficiary.
Sadly, this situation is all too common, with younger Australians or those working part-time or casually having their super savings gobbled up by unnecessary insurance. For many young people who don't have dependents, death cover can be a complete waste of money.
This content was produced by Super Consumers Australia which is an independent, nonprofit consumer organisation partnering with CHOICE to advance and protect the interests of people in the Australian superannuation system.