Peter Stathis looks at the impact narrowing premium gaps could have on life insurance in super.
Some comments reported recently in the media by Comminsure Executive Manager, Jeffrey Scott speaking at the Synchron National Adviser Conference resonated with me. Quoting Jeff; “If a client walks into your office and they have an existing direct policy, retail policy, or have life insurance via an industry super fund, even though these products may not be on your approved products list, you now have an obligation to your client under the best interests duty to investigate these products and compare them against products you are going to recommend¨”
This was a hallelujah moment for me. It vindicated my decision in 2008 to leave my beloved world of life company employment to take on the task of growing the emerging area of retail insurance on platforms. Up until the mid-2000s, life insurance on platforms generally meant members had to contend with group policies negotiated largely on price. Putting the inadequate default cover levels to one side, the upshot for the unsuspecting member was insurance terms and conditions in their super fund that could be altered at the insurer’s discretion. Contrast this to the guaranteed renewable non-cancellable nature of retail policies and most advisers not only had a reasonable basis for recommending an alternative fund but a great justification for the higher premium of the retail policy.
But how times have changed when considering premiums. New research by Dexx&r shows that in many cases the cost of cover in a number of industry super funds will be more expensive than the cost of similar coverage from a retail insurance policy. When this is taken in the context of the additional benefits offered in retail life policies and the fact that many advisers will offset policy commission in lieu of fees or as a 100 per cent offset for the price of their advice, the client is starting to look very smart indeed.
With the addition of further retail insurers on a number of leading super platforms, the missing piece to the retail insurance, choice, is finally tackled. Sure you can take a Super-owned insurance-only policy from any of the main insurers and fund it by an annual partial rollover from the client’s existing super fund. But, how does this additional step look in an age where consumers want their lives simplified? Notwithstanding the 1 July StrongerSuper changes, there are a number of other factors that make retail insurance nearly always the best option when compared to group cover. Here are some to consider.
Group cover in super is often a one size fits all approach. Premium rates will inevitably be blended to cover a wide cross section of occupations and duties so appropriateness to their circumstance isn’t always an option for consideration to the average member. A range of retail insurers on a super platform will get around this element. To illustrate in the case of income protection (IP) for certain hazardous occupations, not all insurers on a platform will offer an age 65 benefit period. While in the case of some professional occupations, another insurer offers a special occupation class with additional benefits that can be super/flexi-linked. Individual needs are better met as a result.
Super/flexi-linking is the option commonly available in retail insurance policies that allows benefits not compatible with SIS conditions of release to be split into a supplemental policy that is individually owned and paid from after-tax /non-super monies. Super/Flexi-linked own occupation Totally and permanently disabled (TPD) is the most commonly used, but scratch the surface and you will find that other benefits such as trauma cover, child cover and even ancillary IP benefits (often referred to as Plus or Comprehensive) can be structured this way. While having these benefits structured/linked like this may not be as good as separate stand-alone policies, where budgetary constraints are a factor for consideration, these structures have the potential to save thousands of dollars and achieve cover that may otherwise have been forgone by your client.
There are obvious cash-flow benefits to the average cash-strapped household with dependent children when premiums for some insurance covers are paid for from super. But many advisers I speak to are thankful to be reminded that for members with super balances in the tens of thousands, choosing the annual premium option will generally achieve a typical premium (frequency mode) discount of eight per cent with most retail insurers.
Other valuable optional benefits not available with group cover that retail policies offer include: Death Buy-back this allows for the reinstatement of death cover (dollar for dollar) after a successful TPD claim, usually after 12 months - or less as is the case with a handful of insurers. Compare the value of this for a member with a dependent family who at 35, is unlucky enough to be totally and permanently disabled to the extent they may never work again. Their estate planning options would be compromised with no or considerably reduced death cover. Also there is the often overlooked waiver of premium (WOP) upgrade to buy-back. Put simply the reinstated death cover premiums are free if you receive a TPD claim.
Level premiums are not offered by group policies. Many would agree that the ability to keep affordable cover in place over a working life is important particularly in light of changing social and demographic circumstances. The decision to postpone having a family means cover may be needed for longer. For this reason the growth I have seen in level premium recommendations since the global financial crisis is great to see. Retail policies that have fixed either all or part of the sum insured are a great way to achieve this.
Having options to make changes to the structure of how cover is owned in the long run is not a function of group cover and while many group insurance schemes offer a continuation option, the fine print for TPD/IP often will require the member to sign a Declaration of Continuing Good Health. Take the situation some years down the track where self-managed superannution fund (SMSF) or self-ownership is more appropriate to a client’s retirement planning needs but their health has deteriorated to the extent that cover is either not available or the replacement policy is offered with exclusions / health loadings. Faced with this, advisers may leave the old super fund open with sufficient funds to continue the old group cover. While there is nothing really wrong with this approach (so long as it doesn’t breach fund cover rules), carefully selected retail insurance on a platform would in a variety of cases offer the ability to request what is known in the industry as cancel and reissue or cancel and replacement of their existing cover.
Put simply the old retail super trustee owned policy is cancelled with the cover moved (like for like) into a new SMSF or self-owned policy without underwriting. For a handful of older clients with young children, the ability to maintain their cover past retirement may be a necessity. For some clients retaining TPD past age 65 on an Activities of Daily Living basis may be appropriate as a means for funding their assisted living facility’s deposit, thereby preserving the value of their estate. The fact that retail life policies expire at age 99 makes this a possibility under cancel and reissue provisions even if the need for super at this age may not be. By contrast most group cover will expire at age 70. The key here is for the retail policy being reissued/replaced to still be available therefore, not a closed policy series.
Finally while not a characteristic that is dependent on the type of insurance used, choosing a super platform that offers the option of anti-detriment payment can help materially lessen the tax burden on super death benefits where they are to be paid to non-dependent adult children.
Long lasting, non-cancellable, broad spectrum cover has always been the hallmark of retail life insurance, yet for many people who understand the need for getting cover, the cost was often the easiest point of comparison swaying their decision to stay with their employer super fund. With the premium gap closing, now may be the time to consider retail life insurance on a super platform.
Peter Stathis is business development risk manager at IOOF.