02 Sep Australian Super Income Protection Insurance vs Retail Income Protection Insurance
This report has been written as a general comparison between the Income Protection provided by Australian Super and that available through a Direct Retail Policy.
It has used readily available resources in the analysis such as Product Disclosure Statements, and looks at the key differences between the policies.
The core variances identified are the very limited benefits and options available through Australian Super; the definitions used in the policy terms; the exclusions placed on policy holders; what a policy holder can insurer; the tax implications, and the upfront and ongoing service available.
The report has the aim of providing the reader with a means to distinguish the policies and enable an educated decision in pursuing either option. The following statistics provide a foundation to the report.
– Every working Australian has a 1 in 3 chance of becoming disabled through illness or injury for more than 3 months before turning age 65.
(Calculations based on data from the institute of Actuaries of Australia 2000. Interim report of the Disability Committee IA Aust: Sydney)
– For 70%, it will actually be caused by an illness as opposed to an injury.
(National Centre for Monitoring Cardiovascular Disease, May 1999)
– Every year approximately 350 000 new cancer cases are diagnosed.
(Australian Institute of Health and Welfare, Cancer in Australia 1998)
– Each hour, around 40 new cancer cases are diagnosed in Australia.
(“Cancer in Australia” 1998 Australian Institute of Health and Welfare)
– Further, 40 000 Australians suffer a stroke each year, for 70% of them, it’s a first.
(National Centre for Monitoring Cardiovascular Disease, May 1999)
– Stroke is the leading cause of long term disability in adults.
(The Garvan Institute of Medical Research 1997)
– By the time a man is 40, the lifetime chance of having coronary heart disease is 1 in 2.
(Heart, Stroke and Vascular Diseases, Australia Facts 2001)
– Only 31% of Australians insurance their ability to earn an income with income protection insurance.
(Investigating Income Protection Insurance in Australia, TNS/IFSA, July 2006)
– The average insurance claim paid outside of super is $132,537, while the average claim paid from an employer default fund is only $70,000.
(Underinsurance Project, IFSA/KPMG, May 2005)
– One in two industry fund members are underinsured by $100,000 or more.
(AIST media release, June 2008)
The above information highlights the risks associated with serious illness and accident, and therefore ones need to protect financial positions through comprehensive Income Protection policies. The statistics show that default insurance within superannuation is a good basic safety net for a member, but it usually provides inadequate cover.
Income Protection Insurance – Benefit Comparison
Superannuation funds are restricted in the options they can provide with their Income Protection policies; however from our research we have found Australian Super offers even less than the restricted benefits. Having a selection of waiting periods for example, enables those with significant savings, holiday pay or sick leave to extend their waiting period, thus reducing their premium.
A typical Retail income protection policy offers 6 options, whereas Australian Super provides 2.
Benefit periods are an important variable to an Income Protection policy.
Australian Super only offers a 2 year benefit period, when legally they are able to provide longer periods of cover.
What this means is that claims are only payable for a limited amount of time. If for example a policy holder suffers from a cancer and has 18 months off work, they have used up 75% of the policy. If the cancer returns at a later date the policy holder is only entitled to a further 6 months of payments. If the average person works a career spanning 45 years and has an average income over that time of $50,000, they will earn in excess of 2.2 million dollars by retirement.
Our view is that it is not a sensible level of security to only cover two years and $100,000 of income. People insuring against a risk should always look at the worst case scenario, enabling all things in-between to be covered.
Financial Advisors and industry professionals are in agreement that people should protect income streams long term. For this reason, Retail policies offer benefit periods to age 65 and 70.
Australian Super Retail Income Insurance
30 or 60 days 14, 30, 60, 90 days, 1 or 2 years
Australian Super Retail Income Insurance
2 years 2, 5 years, or to age 65 or 70
Stepped versus Level Premiums Income Insurance what is best for me?
Although Australian Super provides a relatively cheap stepped premium structure they do not provide the ability to lock in a level premium. With retail insurance you have the ability to select a level premium which is held to age 65. The comparison below shows the significant long term savings with a level premium.
The comparison takes an example policy holder from age 25 through to age 65 and compares their financial position at the end of the policy.
The figures from Australian Super are taken directly from their online calculator and the comparative policy used is through MLC. What it shows is that for someone in the early years of their career they will be significantly better off with a level premium. The calculations show that the policy holder will be $2,052.39 better off with a Retail Policy on a level premium. Once this policy has claimed back its marginal tax rate the savings are 13,505.81. This tax deduction is not available through Australian Super.
Indemnity versus Agreed – Income Protection
An Agreed Value Policy locks in a benefit amount for the life of the policy. This income will be based on what can be proved at the time of application.
An Indemnity Policy will take the life insured’s highest average monthly earned Income in any 12 consecutive months in the two years prior to the current claim. This means that if the life insured’s income has dropped prior to the claim and they prove a lower amount than initially insured; they will receive 75% of the lesser amount. At present Tower does provide an Indemnity contract that will look at the last 3 years in determining a payable benefit.
Australian Super does not provide an Agreed Value policy and their Indemnity policy will only look at the last 12 months. If an employee takes leave without pay or moves into a different role that comes with a short term pay cut; they will only be able to claim on the lesser amount.
Indexation of Income benefits
So that your benefits keep pace with inflation, Retail insurers can apply the Consumer Price Index (CPI) to your monthly insured amount. They are also able to apply this to your benefit amount while you are on claim. If you were on claim long term with a benefit period to age 65 then you would need the benefits to keep up with inflation.
The saying of one dollar today is not the same as one dollar tomorrow is very true. The current rate of inflation in Australia is 3.6% (RBA, 04/08/11). This is stripping away the purchasing power of monthly benefits and needs a policy that will keep on top of it.
Australian Super does not provide this feature. Insured amounts will not increase with inflation.
What income can I Insure?
What we have found is that many employees income is comprised of overtime. In some instances we have found an employee’s total income to be made up of 40% overtime. What we have also established is that they are reliant on it to maintain their lifestyle.
Because of this, if they were to be out of work and only receiving 75% of their base salary they would run into financial difficulty.
With a Retail policy you are able to claim not only your salary/wages and superannuation, but things such as car allowances/Novated leases and regular overtime or bonuses. This means we can insure an employee’s entire package, so their financial situation has as little disruption as possible if on claim.
For full details on what you can add back see our easy to use income protection insurance calculator.
With Australian Super you are not allowed to cover overtime. All that can be covered is a base salary and superannuation.
What will offset my Income protection payments?
Under any Income Protection policy you will be subject to Workers Compensation and TAC payment offsets. What this means is that you cannot claim your full monthly benefit if you are receiving payments from these Government initiatives. Income Protection will however top up the payments if you are receiving less than your full entitlement.
Australian Super has the exact same offsets as above with a few additions. Firstly, Australian Super will not pay you if you are receiving sick leave entitlements. Retail policies will very rarely place this form of exclusion and you can often be paid sick leave while you receive Income Protection benefits.
The Australian Super Insurance Product Discloser Statement also has an exclusion that reads as follows:
Any income that in the opinion of the insurer you could reasonably be expected to earn in your occupation while disabled
This is very ambiguous and leads one to believe that investment returns or rent received from an investment property could offset Income Protection.
Income protection taxation implications
The first tax related issue associated with a policy through Australian Super is that the premiums paid are not tax deductable. Therefore the significant tax deductions available to a policy outside of superannuation are not claimable. Those earning over $37,001 per annum are able to claim back 31.5% of the premiums; whereas someone earning over $80,001 can claim 38.5% back in their annual return. It is essentially 100% tax deductible at an individual’s rate.
The second implication is that Australian Super will deduct the tax from your benefit amount before they pay it to the life insured if on claim. What a retail policy allows you to do is take the full amount while you are sick or injured and pay the tax at a later date when you have returned to work.
As an example, if you earn a base salary of $100,000 the insurer will only cover 75%. This means that your annual benefit has reduced to $75,000. Australian Super will then take out a further $17,475. This means that you will only receive $4,792 per month.
Under a retail policy you can defer the tax payment and pocket $6,250 per month. This is not to mention the superannuation you have covered. Australian Super will put this into your super account, whereas a retail policy gives it to you and how you spend it is at your discretion. With the super benefit you would have a monthly benefit of $7,000. If you are severely injured or sick the extra funds may be required for medical treatments.
Income insurance definitions – What will classify me as disabled from work?
Income Protection policies are very complex products and policy definitions can differ greatly between companies. The most important definition to compare between policies is the definition of “total disability”. Like TPD insurance, the type of duties or employment you must not be able to perform will govern whether you are considered “totally disabled” or not. Some policies define employment to be any employment, including lower paid unskilled work. It is important therefore that your policy will cover you if you cannot perform the duties of your regular occupation.
The definition of Total Disability provided by Australian Super is;
You are considered totally disabled if, because of illness or injury, you are unable to perform at least one income producing duty of your own occupation
The definition provided by Tower as an example is;
You are either unable to perform one or more of the important income producing duties; you are unable to perform the important income producing duties for more than 10 hours per week; or you have suffered a reduction of 80% or more in the ability to generate monthly earnings. These definitions are based on the life insured’s Own Occupation.
What this shows is the broad nature of the definitions available in the retail market. Having a three tiered definition like the one above means a policy holder will not fall through the gaps. It also allows them to continue to work small amounts. Under the Australian Super definition if you so much as take work related phone calls from home you are not classified Permanently Disabled.
In general we have found the entire policy to be very light on. A standard Product Disclosure Document for a retail policy is upwards of 90 pages. The Product Disclosure Statement for Australian Super’s insurance is 24 pages, and is predominantly sales related information.
What happens if I leave my employer?
Under a typical Income Protection policy you have the ability to move from employer to employer without your policy changing. It has portability. With a policy written through Australian Super the policy for Income Protection will cease when your employer stops paying into the fund. There are risks that a policy could lapse if an employer fails to make an on time super contribution.
Another concern is that you are restricted to having your superannuation with Australian Super. The industry experiences constant change and your retirement savings should not be held in a particular fund just for Income Protection reasons.
Income protection insurance exclusions
Income Protection policies all generally have the same upfront exclusions. Australian Super is no different. They will exclude intentional self harm, acts of war, pregnancy and childbirth.
Australian Super has an additional exclusion of any form of service in the Australian Defence Force.
We also rang the Claims and Insurance Department of Australian Super and were told that the policy has Trauma exclusion. The definition of Trauma exclusion was provided by Rupesh and employee of Australian super and is as follows:
An emotional wound or shock that creates substantial lasting damage to the psychological development of a person.
The example provided is that if you were to lose a family member and need time off for psychological reasons then a claim would not be payable.
The concern we have with this exclusion is that it could be passed to all mental disorders if they are provoked by a specific event. The loss of one’s father may be the underlying reason for a bout of depression for example. The following show where claims arose for AMP in 2009. These are claims that were honoured and paid.
■ Other 39.26%
■ Mental Illness 15.44%
■ Cancer – Other 13.62%
■ Musculoskeletal System 10.86%
■ Central Nervous System 4.14%
■ Cancer – Breast 3.59%
■ Heart Attack 2.88%
■ Stroke 2.79%
■ Heart Disease 2.29%
■ Motor Vehicle Accidents 2.28%
■ Respiratory Conditions 1.07%
■ Cancer – Prostate 0.63%
■ Cancer – Bowel 1.15%
Source: Claims Paid 2009, AMP Life Limited Claims.
Mental illness is the second highest source of claims to AMP and therefore not something that should be excluded from a comprehensive policy.
Upfront and Ongoing Service with your Income Insurance policy
CCA Financial Planners are structured to handle a prospective client’s enquiry from advice right through to lodgement and claims. The service we are providing is to give every employee strategic financial advice in relation to their Income Protection.
As a Financial Planning Practice we are positioned to provide personal advice and make recommendations as to the best options for employees. Personal insurance such as Income Protection is not one size fits all; so we are able to identify needs and match a product accordingly.
Only licensed Financial Advisors are legally able to provide this sort of personal advice; so CCA Financial Planners adds significant value to every employee they see. All employees receive a written Statement of Advice which is the legal document that shows the benefits and limitations in taking out a new policy. It is our written guarantee of the advice we provide.
The other area of service difference lies in our flexibility to service the large number of employees. We are authorised to be on site and can therefore service those on both day and night shift. We have and will continue to provide service for night shift, whether it is late at night or early morning.
Claims are the end result of insurance policies and through our experience; we understand how insurance companies handle them. Therefore, we are best placed to assist you to accelerate the evaluation of any claim you may need to make.
CCA Financial Planners provide you with a dedicated Client Support Manager to facilitate the progress of any possible claim – from lodgement, to payment of benefits. We will provide the following Life Insurance claims service.
Additional Income Protection Benefits
Because of the restrictions placed on available benefits through superannuation; policy holders forgo a large range of additional features. The following list takes a range of options that Retail Income Protection policies offer:
• Built in Death Benefit
• Day One cover for accidents – No waiting periods
• Family Support Benefit – A monthly benefit is paid if a family member stops work to care for the life insured
• Child Care Benefits – Covers the cost of providing outside care for children
• Children’s Critical Illness – Lump sum payments if a life insured’s child suffers a critical illness
• Rehabilitation Benefits
• Accommodation Benefit – Covers the cost for traveling to seek medical treatment
• Involuntary Unemployment Benefit – Premiums are waived but cover remains while out of employment
• Critical Illness Option – Lump Sum payments for a range of conditions such as cancer, stroke or heart attack
• Booster Option – Increase cover to 100% of income
• Increase Claims (Indexation with CPI)
• Specific Injury Benefit – Increase payments on certain injuries
• Lump Sum Payout on Income Protection – Receive a lump sum rather than a monthly benefit
• Guaranteed Future Insurability
We acknowledge the difference in premiums between the providers but are able to conclude that this is in direct relation to the watered down policies offered by Australian Super.
The significant lack of options and flexibility makes the policy a one size fits all, which in our belief it should not. Everyone is different and insurance policies should have the flexibility to be tailored to specific needs. Our main area of concern with the benefit comparison is the inability to protect ourselves until age 65.
Income Protection is a means to protect our long term wealth, lifestyle, assets and family; and only insuring 2 years of it seems careless. The introductory statistic of under insurance throughout Industry funds reinforces this point.
The second area of analysis we find significant is that members of Australian Super cannot cover their overtime. When overtime is consistent, lifestyles are built around it. We believe that not insuring it presents additional under insurance risk for employees.
Our tax analysis outlined the inability to claim deductions from the insurance premiums. There is no tax advantage holding a policy through superannuation with Australian Super, whereas outside of super claims can be made.
For those on high marginal rates the tax deductions are quite significant. Another key point in relation to tax is that Australian Super automatically deducts tax before paying to the policy holder. Our argument is that having the ability to pay the tax at a later date creates additional financial security to someone going through what is undoubtedly a traumatic time.
Portability restraints and the lock in effect that Australian Super creates do not provide flexibility to policy holders. The future is unknown and superannuation should not be dictated by an Income Protection policy. What is a good place for our retirement savings today may not be the same into the future.
Initial service and that provided on an ongoing basis was another key differentiator we found with Australian Super and using a Retail policy purchased through a Financial Advisor. The initial advice that a Financial Advisor gives adds significant value to the purchase of a product. The ability to have individual recommendations and a product tailored ensures each person’s needs are met. The ongoing review of the policies also guarantees they are adjusted as individual circumstances do. The final point we have made is the claims process and how the support provided to claimants creates efficiency are care.
The final area of research was into the additional benefits available through Retail policies. Australian Super’s Income Protection policy does not offer any additional benefits to policy holders. Often the benefits are built into Retail policies but through the needs analysis of employees we are able to match products to their requirements. Each employee has specific needs, and having access to additional benefits allows employees to create their own individual policies.
What our research has done is provide justification into the different premiums that apply to Retail insurance and that provided by Australian Super. Insurance is like anything in life and you get what you pay for. Our belief is that you wouldn’t buy the cheapest possible car on the market because of its quality, brand, reliability and security. You should therefore not buy insurance based on price.
Quality comes at a price and protecting something that guarantees your entire way of life should not be subject saving a few dollars. Insurance is a product that creates certainty and our conclusion is that this certainty will not be found with anything less than a quality product.