Superannuation fund members too often do not understand the scope of their insurance coverage and do not realise they are signed to a policy with sub-standard terms, according to the Australian Lawyers Alliance (ALA).
In a submission responding to the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, the ALA has called for the introduction of a ratings system and clear fact sheets to make it easier for consumers to understand the costs and benefits of the death and disability insurance within their superannuation.
The ALA has backed automatic death and total and permanent disability (TPD) insurance cover in superannuation as an overwhelmingly successful means of mitigating Australian households’ serious underinsurance gap but is arguing that consumers need more information.
“It has been, and remains, an invaluable resource for disabled workers and their dependants who often have no other means of managing medical retirement besides resorting to Centrelink,” ALA spokesperson, Josh Mennen said. “However, more information needs to be provided to consumers so that they can understand and compare the differences in coverage available and the expected costs of this coverage – and avoid signing up for ‘junk’ insurance policies that are of little value.”
“Too often consumers are not fully aware of the scope of their insurance coverage and do not realise that they are signed to a policy with sub-standard terms,” he said.
“A ratings system should be developed with tiered TPD definition classes to ensure that consumers can make like-for-like comparisons,” Mennen said. “For example, a policy with definitions that are consistent with the Superannuation Industry (Supervision) Act (SIS) superannuation early release provisions could be a Tier 1 policy and the use of ‘unable’ definitions is a Tier 2; a retraining clause is a Tier 3; pre-existing exclusion clause a Tier 4; an Activities of Daily Living (ADL) test Tier 5; and so on.”
He said that under such arrangements, consumers could clearly see where their TPD cover sat in comparative terms.
“We also recommend that facts-sheets provided by insurers should compare the cost of the premium with equivalent cover available in a benchmarked retail product for someone of the same demographic as the consumer,” Mennen said.
“As we have seen many times, inadequate insurance coverage can result in extreme financial hardship in the case of unexpected injury or illness. Clearer information in the form of a ratings system would make it possible for consumers to better choose insurance to meet their needs and avoid signing up for policies that are not best practice.”