Rest Easy

Sydney Morning Herald

Wednesday June 15, 2005

Peter Weekes

You could land up paying more for life insurance when you switch funds, reports Peter Weekes.

A minefield awaits those who do not conduct a full reconnaissance of their insurance in the post-choice landscape before switching to a new fund.

"For most people, insurance is an incidental that they pay scant attention to," says Mark Berrill, a superannuation lawyer at Maurice Blackburn Cashman and a member of the Financial Services Complaints Tribunal. "A lot of people don't even know they've got it."

Part of the reason is its complexity. But the level of cover you get and the premiums you pay for life, and total and permanent disability (TPD) insurance should be just as crucial when it comes to choosing a fund.

The reason is simple. If a 30-year-old breadwinner with a young family should die, precious little would be saved in super but the family would receive a minimum $50,000 insurance payout. If the person is seriously injured at work, TPD insurance will also help keep food on the table.

There is more to super than just super, says Michaela Anderson, the Association of Superannuation Funds Australia's director of policy and research; it also provides access to cheap insurance.

All super funds, apart from retirement savings accounts, must provide a minimum level of life insurance. The trouble is, different funds have different policies, costs and conditions.

BT Financial Group's director of corporate super, Geoff Peck, concedes that evaluating insurance can be a daunting task but it's as important as grappling with fund fees and performance.

"People should consider insurance premiums as part of the overall cost of their super fund," he says.

"In other words, don't just treat them completely separately because the insurance premiums can be more than the administration cost of running a super fund.

"They should also be aware that insurance premiums can be calculated differently depending on the fund and whether you are young or old, blue-collar or white-collar, or smoker or not."

A recent study by ChantWest Financial Services, commissioned by the Investment and Financial Services Association, revealed that insurance premiums can vary by a factor of up to 22 times.

For example, a blue-collar 50-year-old male could pay from $130 to $2932 annually for the same death and TPD cover, depending on the fund. This is an extreme case, but there are wide variations in premiums, so you should do some homework before dumping your existing fund.

The ChantWest study found that large corporate funds usually offered the lowest premiums as well as automatic acceptance. This is also offered by some employer-sponsored industry funds but the level of cover allowed is generally lower, the report says.

Automatic acceptance means a fund member does not need to provide any medical evidence to qualify for cover as it is offered as a group arrangement. As individual risk is not calculated in the premium, it is usually substantially cheaper. For people with less than perfect health, switching could be problematic.

Peck says those who want to switch from a fund with automatic acceptance should first investigate the requirements of any new fund.

"If you change, you may need to provide medical evidence to get the same level of insurance in the new fund," he says.

"You may inadvertently give up cover you have in an existing super fund because you've make the decision to move to another fund based on other issues, only to discover something is wrong and the fund won't give you the same cover."

Peck recommends those wanting to switch funds ensure they have been accepted into the new fund and qualify for its insurance before quitting the old fund. This will prevent changeover periods when you are not covered.

"This may involve being a member of two different super funds for a period of time, but at least it means that you haven't left the old super fund and burnt the insurance bridge before you have set up the new cover," he says.

Some policies have a continuation option that allows members who are switching to take their insurance with them.

Essentially, you are converting your group cover to a private insurance policy - with you taking up the payment of the premiums directly.

"The beauty of continuation options, where they exist, is that you can take up a private policy in a lot of cases without having to worry about exclusions for pre-existing health problems," Peck says.

"There is often a differential between the wholesale rate you pay in a group scheme and the rate you pay under a continuation policy, but it's usually not the full retail rate."

After July 1, most funds' insurers are expected to continue to allow members to increase their cover, though those with automatic acceptance may have some hurdles that demand a medical test.

The ChantWest report found that while non-profit industry funds laud it over their for-profit retail counterparts in terms of fees, on insurance the distinction is less clear-cut.

Robert Nunez, the managing director of IFS Insurance Broking, which represents industry funds, says people should always be careful to compare like with like and check premiums, breadth of the cover, terms and conditions, policy definitions and exclusions.

"You really need to take a wide-ranging view and comparison of the various key elements. It's quite possible that members can go backwards," he says.

CHOOSE YOUR FUND

Large retail corporate funds tend to offer the best insurance value for young white-collar workers under 40.

Multi-industry funds typically have higher premiums than funds that specialise in a particular industry.

Industry funds that specialise in specific industries offer the best value for blue-collar workers of all ages.

Retail funds are generally good value for white-collar non-smokers.

Source: Chant West Financial Services

STAYING PUT

Lewis Farrugia, 49, has no intention of switching funds after July 1. This is not due to apathy, but rather to his belief that the fund he is in meets his needs, particularly when it comes to insurance.

As a father of two, Farrugia says fees and insurance premiums are both important, but the latter come out slightly ahead.

"You don't know what things are going to happen in the future," he says. "But at least I know if something happens to me personally, there will be some protection for me and my family."

Farrugia, who works for an auto parts manufacturer, has been contributing to his STA industry fund for about eight years. Given his age and blue-collar occupation, Farrugia falls into one of the higher-risk categories.

According to the Chant West study, this category has the largest variation in death and total and permanent disability (TPD) premiums, ranging from $130 to $2932 annually for $100,000 in cover.

Farrugia can increase his cover if he wants, but says he is happy to leave it where it is.

"At the moment it is adequate, but the older I get in life, the more important insurance becomes, and it's one of the things I tend to look at now and again to make sure it's adequate for my needs," he says.

© 2005 Sydney Morning Herald

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