Industry fund REST Super revolutionised its insurance offering in December by unhooking death cover from total and permanent disability (TPD), coming closer than any fund has thus far to solving the problem of creating a default cover to suit a diverse membership.
REST’s chief executive Damian Hill described the fund’s redesign of its insurance offering as “the biggest change to superannuation since the introduction of Choice”.
The changes are the first attempt by a super fund to separate death from TPD, and recognise beyond rhetoric that while many young people are underinsured when it comes to protecting their income, they are typically overinsured for death cover.
While members can easily apply for a personalised level of insurance, the vast majority, particularly younger members, sit in their fund’s default option, which rarely fits any individual’s specific needs. Improving the default cover has thus become a priority for a number of funds.
After negotiation with its group insurer AIG, REST changed its default option, known as Basic Cover, so that the level of death cover now follows a bell curve: starting out at $30,000; peaking at $210,000 around the age of 40; and dropping back down to $10,000 as the member approaches 60 years of age. This design acknowledges that the average 18-year-old does not have dependents or mortgage payments owing, and their biggest expense upon death will probably be the cost of a funeral. At that age, money deducted for insurance could be put to better use growing the member’s account balance for retirement.
Previously, if a member became disabled, they would receive a death/TPD payout of $92,760 (which gradually became less after the age of 40) and two years of income protection payments (at about $1000 per month).
Obviously, if a young person became disabled for life, they would have a difficult time supporting themselves under this arrangement.
Under the new offering, members that become disabled will receive a more modest lump sum of $50,000 to help with initial costs, and then an annuity of up to $1,500 per month, or 84 per cent of their pre-disability income, whichever is the lesser, until the age of 60. Furthermore, 9 per cent of that monthly payment will be directed into a superannuation account to support them once the annuity stops.
Chief executive Hill, said that in deciding upon the new direction, the fund took into consideration that members have different insurance needs depending on their life stage. The result is that for some members default insurance is now more expensive, while for others it has become cheaper.
“Our new cover is based on member needs instead of being based on a fixed cost,” he said.
REST has scrapped its $2 per week insurance fee. Those in Basic Cover will now receive five units of cover for as little at 90c up to the age of 17 (20c for death, 5c for TPD and 65c for IP), or as much as $9.05 per week for the five units for members aged 45-59 ($2.55 apiece for death and TPD, $3.95 for IP).
The average 26-year-old REST member now pays $4.90 per week for $148,000 of death cover, $50,000 of TPD cover, and $1,250 in monthly income protection payments until the age of 60.