There exists an important trade-off between price and quality when it comes to insurance inside superannuation and particularly with respect to total and disability insurance, with superannuation fund members at a disadvantage to those using financial advisers, according to the Association of Financial Advisers (AFA).
As well, the AFA has criticised the involvement of lawyers in insurance claims and the fees they charge, arguing that “there needs to be greater controls on what can be paid to lawyers and other parties who assist with claims”.
In a submission responding to a Treasury discussion paper on the use of universal terms for insurance within MySuper, the AFA said that in many of the cases it had reviewed, superannuation funds had been willing to reduce the quality of definitions in order to achieve a cheaper premium.
“We do not believe that this is in the best interests of superannuation fund members, because it means that they have a greatly diminished chance to make a successful claim,” it said. “Whilst ‘cheap insurance premiums’ may help the trustees to sell their fund to consumers, it does not mean that existing and prospective members will understand the level of cover they have, the limitations of the cover or how it compares to other insurance products available within the market.”
“We therefore support both an increase in the quality of the life insurance products made available through employer superannuation and the use of standardised or universal terms,” the AFA submission said.
The AFA argued that clients who get financial advice, generally have a significantly better understanding of how much insurance they need and are likely to have a much higher level of insurance than those who rely upon default arrangements.
“Often these members of employer super funds simply have no understanding of what they or their family might need in the event of their death or disability or the terms and conditions which will affect the outcome of a potential claim,” the submission said.
The AFA said that, currently, superannuation fund statements contained inadequate disclosure of key information and warnings with respect to the member’s insurance arrangements, including with respect to exclusions.
“This has led to an insufficient level of knowledge by the general public, and a level of scepticism that claims will actually be paid,” it said. “In addition, there is a lack of understanding where claims have been denied, perhaps because they did not meet the restricted terms and definitions agreed to by the Trustee and set out in the [product disclosure statement] PDS or policy document."
“This has resulted in negative media coverage and consumer concerns about the value of life insurance. This has broader implications and has been a point of concern for many of the Financial Advisers throughout Australia,” it said.
While criticising the involvement of lawyers in claims, the AFA submission said that by contrast many financial advisers did not charge for a standard insurance claim and those that did charged a very low fee by comparison.