Insurance inside your industry super fund – quality or just discount cover?
Many of us through our working life have had insurance through the super fund that our employer has organised as their default fund. Often these default funds are funds organised for employers in that particular industry or employees in that industry. Thus the term industry fund has become prevalent. Generally speaking industry funds offer two main benefits for their members, being reduced administration fees on their investments and access to discounted premiums on the insurance cover inside the fund.
It is important to review the paperwork received from the the Employer Super Fund/Industry Fund to ensure you are aware of the terms of cover being offered. Be mindful of:
- Pastime exclusions
- Pre-existing conditions
- offset clauses for sick leave
- policies terminating upon cessation of employment
- policies which cease if no contributions have been payable into the account for a specified period
- decreasing cover
- the right of the fund to cancel insurance at any time
- salary continuance cover which ceases after the insured has made a claim for TPD
This article will focus on the insurance components in the industry funds and the ‘tips and traps’ of these investment plans including:
- What are industry funds and how do they differ from group insurances schemes
- What are the advantages of insurance inside industry funds?
- What are the limitations of insurance inside industry funds?
- How do they compare to an insurance policy offered by an adviser?
An extract from a publication prepared by ThreeSixty, a division of GWMAS, appears below.
What are industry Funds and how do they differ from group insurance schemes?
Industry funds are large scale funds generally offered to employer groups and other members. The funds are invested in a strategy depending on the age of the insured. This strategy can usually be altered at the request of the member. These plans are large scale with minimal client contact, generally solf without financial advice and offer discounted investment administration and insurance premiums. Group insurance schemes are offered as a benefit of employment with the premiums funded by the employer. As the policy is ultimately owned by the company and not the insured, the employer can cancel and amend cover at their discretion without consulting the members.
Advantages of Insurance inside industry funds
As previously stated, industry funds are large scale funds offered to employer groups. The main advantages of insurance inside industry funds are:
- Cost: given the large member base, premiums are offered as ‘wholesale’ or discounted rates. The covers usually expire earlier than regular policies and have a reduced number of benefits available to their members.
- No underwriting: Rather than spend time collecting medical information from their members and assessing their individual health risks, the industry funds rely on the employers to hire what they assume are healthy people and cover is offered without the financial burden of medical assessments. The maximum level of cover available without medical underwriting is known as the Automatic Acceptance Limit and set by the super fund depending on the number of employees and the industry in which they are employed.
- Simplicity: Usually arranged by the employer using a specific default level, the insured is provided with a level of cover without completing any health forms or engaging with a financial adviser. This cover can be increased upon application through the super fund. This cover can also be cancelled at any time.
As a general rule, the higher the number of employees insured, the higher the level of cover available through the automatic acceptance limit (AAL). All cover above the AAL is subject to medical underwriting, which may involve blood and other tests. Any loadings or exclusions can generally only be applied to the cover in excess of the AAL.
Limitations of insurance inside industry funds
The main disadvantages of insurance inside industry funds are:
- Basic cover: Usually no ‘bells and whistles’ and cover is often quite limited due to the discoounted underwriting and SIS regulations preventing the client from receiving more than 75% of their pre disability income under a Non Commutable Income stream. The definitions and terms of the product are usually not as favorable when compared to retail insurance policies sold with financial advice.
- Offsets: Depending on the product selected, the policy may include a number of offset clauses including sick leave, any pother policy and workers compensation entitlements. The policy may also cease if the insured is totally disabled. Many older clients may find their cover reducing in later years.
- Underinsurance: As no financial advice has been sought, the cover may be insufficient to meet the needs of the client in the event of death. The insurable income reported by the employer may not include bonuses, commissions, regular overtime or superannuation contributions.
- Termination: The benefit will often cease when the insured changes employment. Not all funds offer a continuation option to transfer the cover to a self owned policy and cover may cease despite the client’s intentions of staying in the workforce.
- Exclusions: Some policies may apply exclusions including depression, drug and alcohol related claims, criminal activity or pre-existing conditions. Some industry funds may cancel cover at any time.
How does the insurance within an industry fund compare with cover offered by an adviser?
To ensure that premiums are affordable for all members without eroding their retirement savings, the products offered by the industry funds are generally basic relative to other providers on the market, however they do provide their members with valuable (although quite basic) cover. It is important to consider that retail products offered by Financial Advisers are more comprehensive, have more favorable definitions and offer more guaranteed cover, compared to industry funds and if your employment conditions change the policy remains in force as agreed at the time of application, The definitions and features with a policy offered by an adviser are of higher quality with less offset clauses providing greater security and opportunity to claim. Furthermore, the level of cover recommended by an adviser will more likely meet your long term needs.
The information contained in this publication is current as at 11 October 2011 and is prepared by ThreeSixty, a division of GWM Adviser Services Limited ABN 96 002 071749, registered office 105-153 Miller Street North Sydney NSW 2060. This company is a member of the National group of companies. Any advice in this publication has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on any advice, consider whether it is appropriate to your objectives, financial situation and needs. Past performance is not a reliable indicator of future performance. Before acquiring a financial product, you should obtain a Product Disclosure Statement (PDS) relating to that product and consider the contents of the PDS before making a decision about whether to acquire the product.
Where to from here?
To ensure you are adequately protected with a quality product, it is important to review your existing insurance arrangements and determine whether these levels are sufficient to meet your long term needs, with the most appropriate features and benefits based on your personal circumstances.
If you would like to discuss the topics raised or if you would like more information, speak to your financial adviser or contact Dan Smith of Plan 2 Prosper on 07 49265 570.
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Dan Smith is self employed and is for many families their trusted Financial Planner based in Rockhampton. He has clients in various locations throughout Australia but predominately in Central Queensland And specifically the geographic area encompassed by the Rockhampton Regional Council.
This information is intended to only provide you with general information and, while the sources for the material are considered reliable, no responsibility is accepted for any inaccuracies, errors or omissions. Before making a decision based on this information, you must consider its appropriateness having regard to your objectives, financial situation and needs. We recommend you obtain professional financial advice specific to your circumstances.
Dan Smith and Dancin Pty Ltd ABN 71 531 338 371 trading as Plan 2 Prosper are Authorised Representatives of GWM Adviser Services Limited ABN 96 002 071 749 trading as MLC Financial Planning, an Australian Financial Services Licensee, with its Registered Office at 105 – 153 Miller St, North Sydney NSW 2060