Look Before You Tick
Sydney Morning Herald
Saturday May 29, 1999
Buying life insurance through your super fund is a breeze. You just tick a box and it's done. No messy paperwork, no health checks.
You don't even have to reach into your wallet or write a cheque - the super fund does all that for you.
In many instances, a base level of insurance cover is compulsory anyway. Why shop around for supplementary cover when it's easier to roll it all up into the one package? An existing health problem? No problem - you'll still get a basic level of cover at the standard price, unlike on the open market.
Add the fact that life insurance bought by you is not tax-deductible, but for a super fund it is deductible as a running expense, and the argument seems to be signed, sealed and delivered.
But is this growing trend for financial service providers to offer you "add-on" services just a little too simple? Sure, the funds trumpet their "cheap insurance" and "great rates", but just how great depends very much on who is doing the buying.
In my own case, term life cover of about $516,000 costs me $350 annually. About $6.73 a week.
The same premium paid through my industry super fund, would buy me less than $280,000 worth of life insurance. The fund calls this "great value insurance".
An isolated example?
A male construction worker would pay $500-$600 for $200,000 worth of term life cover at age 30 (even assuming he is a smoker). But through his industry fund C+BUS he would be paying about $100 a year for just $25,000 worth of cover.
A 40-year-old female, non-smoking, office worker can get life cover of $200,000 for about $7.70 a week on the open market. The same money would buy her about $185,000 of cover through the Australian Retirement Fund.
What should be becoming obvious is that it is the younger, lower-risk members of super funds who are subsidising their risk-prone colleagues through these group insurance schemes.
In the building industry a 50-year-old pays the same cost as a 30-year-old and receives the same level of cover - despite the fact that on the open market his insurance would cost about four times as much as his younger colleagues'.
While not so dramatic, older workers also do better in other professions - although their benefits are still more expensive than for younger fund members.
Because the costs of life insurance through super funds are distant, and often hard to distinguish from other fees and charges, it is easy to overlook the need to question whether you are getting a good deal.
Also complicating the comparisons are whether the fund includes total and permanent disability cover in the life insurance package.
Alex Dunnin, from Rainmaker Research Services, says employers are increasingly asking about insurance as a second priority after investment returns. It is seen as a big marketing tool for super funds. But fund members should be aware that the same sort of group deal buying that allows the funds to shout about "cheap insurance" - and they often do get special treatment from the insurers who drool at signing on hundreds of new policies - can penalise younger, healthier members.
Many super funds have developed a formula that attempts to overcome this. Typically, funds will offer units of insurance at a set price. But the cover you get per unit reduces for each year after a certain age limit - usually about 30 or 35.
This, however, can mean a rapid deterioration in cover once you pass this age limit - not particularly attractive for "older" members. Other funds have countered this with set benefits, or two-tiered unit levels such as one for members under 45 or 50, and one for older members.
It's all about trying to get equity into a product that is basically inequitable. Life insurance costs have always been influenced by age and health - simply because these are the factors that influence your risk of actually dying.
Another issue worth considering is the beneficiary of your life insurance. Under the present rules, the trustees of the fund can overrule your choice of beneficiary. This has dissuaded some fund members from going down the super fund route and, unless your beneficiary is a dependent, lump sum tax will also apply on any super fund insurance payout - as opposed to normal life insurance benefits, which are tax-free.
And if your life insurance, plus your accumulated super, should exceed your Reasonable Benefit Limit, the beneficiaries will pay the highest marginal rate on the excess amount.
Yes, life insurance through your super fund can be cheap, simple, and, best of all, the premiums are a deductible expense of the fund. But, like any other purchase, blind acceptance may mean you overlook the negatives.
* Market quotes in this column come courtesy of www.mymoney.com.au which has recently added an insurance comparison facility to its service.
It's all about trying to get equity into a product that is basically inequitable
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© 1999 Sydney Morning Herald