Jayson Forrest is the managing editor of Money & Life Magazine.
The recent Protecting Your Super package provides planners with the ideal opportunity to re-engage their clients with their insurance needs.
Underinsurance in Australia continues to be a huge issue facing the community, particularly in respect to building financial protections for the future wellbeing of Australians.
Recent research from Rice Warner reveals that 16 million Australians are underinsured, with less than half (42 per cent) of Australians having enough life cover to provide the same standard of living for their families if they were to pass away. In fact, Rice Warner estimates the underinsurance gap to be about $1.83 billion.
A common cause of underinsurance in Australia is the reliance people place on their superannuation for their life insurance needs. However, most super funds only cover the policy holder for a lower amount than is probably required to maintain their standard of living in the event of disability or incapacity.
Add to this the recent Government changes as part of the Protecting Your Super (PYS) package, which affects insurance held in super accounts deemed to be in-active, and the issue of underinsurance in Australia has the potential to get worse. However, it’s not all bad news.
The introduction of the Government’s PYS package from 1 July 2019, provides financial planners with the ideal opportunity to re-engage with their clients in relation to their insurance needs and safe-guarding their financial future.
The PYS package is designed to protect Australians’ super savings from unnecessary erosion by fees and insurance costs that can occur by holding multiple super accounts. Essentially, super fund members with inactive accounts risk losing their insurance cover unless they actively opt-in to keep it.
An account is considered inactive if no amount has been received by the trustee (such as contributions or rollovers) for a continuous period of 16 months. If a contribution or rollover is received into the super account, this will reset the 16-month period.
However, the onus is on the member of an inactive fund to opt-in to retain their insurance cover held within the fund, otherwise, the super fund trustee must cancel the insurance at the 16-month mark.
According to AIA Chief Retail Insurance Officer, Pina Sciarrone, it’s important that financial planners are aware that the changes don’t just impact MySuper members, who may have been given insurance automatically that they were unaware of. And it also applies to members who have voluntarily taken out personal insurance in a ‘choice’ fund and in an insurance only superannuation fund.
However, a member will still continue to be protected by insurance for any period for which premiums have already been paid, before the cover is switched off.
“The Government has since introduced a further Bill, called Putting Members’ Interests First, which will require trustees to only provide insurance to a member of a choice or MySuper product on an opt-in basis where the member is under 25-years-old, or where they have an account balance of less than $6,000,” Pina says.
“This is likely to have the unintended consequence of impacting people who have chosen to hold ‘risk-only’ superannuation products for their insurance cover, where the contributions will cover the premium cost only and won’t accumulate an account balance.”
The Government is proposing that these requirements commence from 1 December 2019, although the earliest that the Bill can be debated is September.
Consider the options
Members with inactive super accounts who wish to keep their insurance cover can either:
contribute or rollover an amount to their super fund to make it active; or
provide an election in writing to their super fund to maintain their insurance cover.
“If someone wants to keep their cover, they only have to submit a valid written notice to their fund once. The election will apply, even if their account is inactive for a continuous period of 16 months in the future,” Pina says.
“However, reactivating an account with a contribution will only resolve inactivity for a further 16 months, before the account becomes inactive again and the cover will again be at risk.”
According to Pina, these actions are particularly important for people with individual advised policies held in super, as these policies have been purposefully taken out, and it is unlikely that someone would expect to lose this cover.
According to Shane Jones AFP® – Executive Adviser and Managing Director of Trendlines – the PYS package has significantly raised consumer awareness of insurance within superannuation.
“The financial services sector has actively communicated the risks of an inactive super fund and the implications to insurance policies held within these funds,” Shane says.
“In so doing, we’ve seen increased engagement from these members with their insurance, which is a good thing for the industry, but more can be done.”
Shane points to the introduction of the Single Touch Payroll system from 1 July 2019, which he says is a good step forward, as it should finally protect consumers who were at risk of losing their insurance policy held in super, as a result of their employer not making the compulsory SG contributions.
Pina suggests the recent changes to super provide planners with an ideal opportunity to re-engage with their clients about their insurance. Some of the key conversations planners should be having with their clients concerning these recent changes include:
helping them determine if they are affected by the changes;
assisting them to assess whether the cover they hold in super funds is appropriate for their needs;
explaining what they need to do if they do not want to be at risk of losing their insurance cover;
discussing if they should consider making a contribution or rollover an amount to their super fund to make it active;
assisting them to inform their fund should they decide to make an election to retain cover in an inactive account; and
ensuring that they understand that should they choose to do nothing, their insurance may not continue if their account has been inactive for 16 months.
Shane agrees, saying they are the types of conversations his practice is already having with clients.
“For example, we’re talking to clients about how certain types of insurance, like Total and Permanent Disability (TPD) or income protection, can provide an invaluable safety net to support a client’s family due to illness or accident,” he says.
“Whether it’s to cover off the mortgage, meet funeral costs or provide the family with additional financial support during times of hardship, we are using these discussions with clients to talk about their pre-existing conditions, and to explain that by allowing their policy to lapse, it may affect future claims on a new policy.”
However, for clients who see value in taking out insurance, Shane is also using this as an opportunity to engage with them about their insurance needs, including whether to start making contributions or to opt-in. He says either way, both approaches result in the majority of these discussions resulting in advice.
Insurance inside and out
When it comes to the pros and cons of holding insurance within super or outside of it, Pina says it’s an interesting question.
“Every Australian has life insurance needs, which will depend on what they value and wish to protect. The type and level of protection required changes, based on age, life stage, income, assets and debt.”
He says for some clients, default cover in super may be adequate and an affordable alternative – for example, someone with no dependants or mortgage, who simply needs a basic safety net to protect their income in the event of a significant illness or injury. However, this type of cover is not tailored to a person’s individual circumstances, and may not have been reviewed by a planner with the person’s best interests in mind.
“Others will need the services of a planner to get individualised cover to manage their changing lifestyle needs. Individuals and their families are entitled to assistance with wealth protection if they wish to seek this out, and financial planners are best equipped to provide this,” Pina says.
It’s a view shared by Shane and while he generally encourages his clients to carry insurance inside their super, he says there are situations where he wouldn’t recommend this.
“An example would be ‘Own Occupation’, which does not meet the SIS regulations condition of release and therefore, this policy cannot be owned in super. You do have the ability to link the Own Occupation features to an ‘Any Occupation’ policy. This way, the majority of the premiums are deducted from super for the Any Occupation policy, and the additional features and benefits of an Own Occupation policy that otherwise would not meet the SIS condition of release, are paid for personally,” he says.
“This is the type of strategy you would recommend to clients who have a large financial commitment and who are working in a highly specialised field.”
Similarly, you can have the basic income protection owned in superannuation and the premium features owned outside of super, where you pay the additional premium. The biggest consideration here is likely to be the agreed monthly benefit versus indemnity, which is dependent on the client’s occupation, and consistency of their wages and revenue.
However, for Shane, the advice he offers clients for owning insurance in super isn’t simply restricted to the beneficiaries. For him, his prime consideration is to ensure his clients are financially protected.
“The time when our advice is of the highest priority is when our clients’ families are young and their expenses and mortgages are high. It’s during this stage of life that an insurable event could totally ruin a family’s financial position. Therefore, to ensure we have an adequate level of insurance across all policies, we split the payments between superannuation and self-ownership, as the client’s budget and objectives direct us.”
Issues of underinsurance
When it comes to the issue of underinsurance in Australia, Shane feels the industry is working better to address this problem. This includes insurance companies providing discounts on policies held within super, particularly policies that are linked to programs that promote greater health and wellness amongst Australians.
“There are engagement programs that reward users for having a healthy Body Mass Index (BMI), fitness trackers that record your daily steps, through to lifestyle benefit programs, like AIA Vitality, where benefits and discounts on premiums are rewarded to program participants.
“These programs are designed to further engage the client with their insurance policy, through fun activities.”
According to Shane, clients involved in programs, like AIA Vitality, where they are able to regularly enjoy the numerous lifestyle benefits their policy provides, are more engaged and focused on their decision-making around insurance.
“Gone are the days of having to make a claim before you’re able to see any benefit of owning an insurance policy,” he says.
As a result, Trendlines is spending less time on educating clients about insurance and more time on ensuring they have the right levels of cover and the right definitions in place, to provide greater certainty that the insurance policy will be paid at claim time.
“I believe this higher level of awareness by consumers today of insurance, in part due to the recent PYS package, provides an incredible opportunity for planners to ensure their clients have adequate levels of insurance,” he says. “The opportunity to provide insurance advice has never been better.”
To leverage this opportunity, Shane is increasingly turning to social media as a means of acquiring new clients.
“Social media allows you to directly reach your target market and the better your marketing, the lower your cost of acquisition can be. By doing so, the profession has never been in a better position to reduce the effects and social costs of underinsurance in Australia,” he says.
For more on the latest superannuation changes affecting insurance, click here.